    [Joint House and Senate Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 115-116

         THE DYNAMIC GAINS FROM FREE DIGITAL TRADE FOR THE U.S. ECONOMY

    =======================================================================

                                    HEARING

                                   before the

                            JOINT ECONOMIC COMMITTEE
                         CONGRESS OF THE UNITED STATES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 12, 2017

                                   __________

              Printed for the use of the Joint Economic Committee

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                            JOINT ECONOMIC COMMITTEE

        [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

    HOUSE OF REPRESENTATIVES             SENATE
    Patrick J. Tiberi, Ohio, Chairman    Mike Lee, Utah, Vice Chairman
    Erik Paulsen, Minnesota              Tom Cotton, Arkansas
    David Schweikert, Arizona            Ben Sasse, Nebraska
    Barbara Comstock, Virginia           Rob Portman, Ohio
    Darin LaHood, Illinois               Ted Cruz, Texas
    Francis Rooney, Florida              Bill Cassidy, M.D., Louisiana
    Carolyn B. Maloney, New York         Martin Heinrich, New Mexico,
    John Delaney, Maryland                   Ranking
    Alma S. Adams, Ph.D., North          Amy Klobuchar, Minnesota
        Carolina                         Gary C. Peters, Michigan
    Donald S. Beyer, Jr., Virginia       Margaret Wood Hassan, New
                                             Hampshire

                     Whitney K. Daffner, Executive Director
                 Kimberly S. Corbin, Democratic Staff Director

                                C O N T E N T S

                                  ----------

                         Opening Statements of Members

    Hon. Mike Lee, Vice Chairman, a U.S. Senator from Utah...........     1
    Hon. Erik Paulsen, a U.S. Representative from Minnesota..........     2
    Hon. Martin Heinrich, Ranking Member, a U.S. Senator from New
      Mexico.........................................................     3

                                   Witnesses

    Mr. Daniel Griswold, Senior Research Fellow and Co-Director of
      the Program on the American Economy and Globalization, Mercatus
      Center at George Mason University, Arlington, VA...............     5
    Mr. Sean Heather, Vice President, Center for Global Regulatory
      Cooperation, U.S. Chamber of Commerce, Washington, DC..........     7
    Mr. Nick Quade, General Manager, Ecommerce Division of Relay
      Networks, Inc., Deephaven, MN..................................     9
    Hon. Daniel Alejandro Sepulveda, Former Ambassador and Deputy
      Assistant Secretary, U.S. Coordinator for International
      Communications and Information Policy, U.S. Department of
      State, Washington, DC..........................................    10

                           Submissions for the Record

    Prepared statement of Hon. Hon. Mike Lee, Vice Chairman, a U.S.
      Senator from Utah..............................................    30
    Prepared statement of Hon. Martin Heinrich, Ranking Member, a
      U.S. Senator from New Mexico...................................    30
    Prepared statement of Mr. Daniel Griswold, Senior Research Fellow
      and Co-Director of the Program on the American Economy and
      Globalization, Mercatus Center at George Mason University,
      Arlington, VA..................................................    32
    Prepared statement of Mr. Sean Heather, Vice President, Center
      for Global Regulatory Cooperation, U.S. Chamber of Commerce,
      Washington, DC.................................................    37
    Prepared statement of Mr. Nick Quade, General Manager, Ecommerce
      Division of Relay Networks Inc. Deephaven, MN..................    50
    Prepared statement of Hon. Daniel Alejandro Sepulveda, Former
      Ambassador and Deputy Assistant Secretary, U.S. Coordinator for
      International Communications and Information Policy, U.S.
      Department of State, Washington, DC............................    52
    Response from Mr. Daniel Griswold to Questions for the Record
      Submitted by Chairman Pat Tiberi...............................    55
    Response from Mr. Daniel Griswold to Questions for the Record
      Submitted by Representative Carolyn B. Maloney.................    56
    Response from Mr. Daniel Griswold to Questions for the Record
      Submitted by Representative David Schweikert...................    57
    Response from Mr. Sean Heather to Questions for the Record
      Submitted by Chairman Pat Tiberi...............................    57
    Response from Mr. Sean Heather to Questions for the Record
      Submitted by Representative Carolyn B. Maloney.................    58
    Response from Mr. Sean Heather to Questions for the Record
      Submitted by Senator Klobuchar.................................    58
    Response from Mr. Sean Heather to Questions for the Record
      Submitted by Representative David Schweikert...................    59
    Response from Mr. Nick Quade to Questions for the Record
      Submitted by Chairman Pat Tiberi...............................    59
    Response from Mr. Nick Quade to Questions for the Record
      Submitted by Representative Carolyn B. Maloney.................    60
    Response from Ambassador Sepulveda to Questions for the Record
      Submitted by Chairman Pat Tiberi...............................    61
    Response from Ambassador Sepulveda to Questions for the Record
      Submitted by Representative Carolyn B. Maloney.................    62
    Response from Ambassador Sepulveda to Questions for the Record
      Submitted by Senator Amy Klobuchar.............................    63

         THE DYNAMIC GAINS FROM FREE DIGITAL TRADE FOR THE U.S. ECONOMY

                                  ----------

                          TUESDAY, SEPTEMBER 12, 2017

                        United States Congress,
                              Joint Economic Committee,
                                                        Washington, DC.
        The Committee met, pursuant to call, 10:00 a.m. in Room 216
    of the Hart Senate Office Building, the Honorable Mike Lee,
    Vice Chairman, presiding.
        Representatives present: Paulsen, Comstock, Beyer, and
    Delaney.
        Senators present: Lee, Klobuchar, Heinrich, Peters, and
    Hassan.
        Staff present: Theodore Boll, Daniel Bunn, Kim Corbin,
    Whitney Daffner, Connie Foster, Dori Friedberg, Colleen Healy,
    Matt Kaido, Christina King, A.J. McKeown, Allie Neill, Victoria
    Park, Rohan Shetty, and Joy Zieh.

       OPENING STATEMENT OF HON. MIKE LEE, VICE CHAIRMAN, A U.S.
                           SENATOR FROM UTAH

        Vice Chairman Lee. Good morning, and welcome to the Joint
    Economic Committee's hearing on digital trade.
        Chairman Tiberi could not be here today and has asked me to
    chair the hearing. I want to welcome my colleague, Ranking
    Member Heinrich, and other members of this Committee and the
    panel of expert witnesses who are appearing before the
    Committee today.
        What, you might ask, is ``digital trade''? It covers a wide
    variety of economic activity, including international orders
    transmitted through websites, global connectivity enabled by
    email and voice-over internet protocol, international banking,
    and data transmissions to manage global supply chains.
        Advancements in technology mean that digital trade is
    capable of delivering ongoing improvements in production, in
    distribution, and value for the American people. U.S. firms
    have been pioneers and global leaders on the digital technology
    frontier. American consumers and businesses benefit
    tremendously from the ability to buy and sell across borders
    and gain access to products and to customers.
        We are swiftly approaching the point at which the word
    ``digital'' will be an unnecessary adjective for trade. It will
    just be ``trade,'' although I am sure trade lawyers will want
    to maintain the extra level of specificity just for billing
    purposes. It makes their billing statements perhaps more
    interesting for them and lucrative.
        But we need to work both domestically and internationally
    to facilitate trade and innovation. We should seek to ensure
    that sensible regulations and standards are put in place for
    the protection of intellectual property and private
    information.
        Congress has set clear priorities for negotiating trade
    agreements that can lower trade barriers for digital goods and
    services, and the Trump administration is pursuing those
    priorities in current NAFTA discussions.
        It is critical for future U.S. economic success to ensure a
    regulatory setting in which innovators, entrepreneurs, and
    businesses can experiment with new technology and succeed in a
    global market.
        I will now yield to Representative Paulsen who earlier this
    year launched the Bipartisan Digital Trade Caucus in the House
    of Representatives.
        [The prepared statement of Vice Chairman Lee appears in the
    Submissions for the Record on page 30.]

     OPENING STATEMENT OF HON. ERIK PAULSEN, A U.S. REPRESENTATIVE
                             FROM MINNESOTA

        Representative Paulsen. Thank you, Vice Chairman Lee, for
    holding this hearing on an issue that is becoming increasingly
    important to the American and global economies. As a strong
    advocate for a robust trade agenda, I believe we need to be
    engaged, we need to be educated, and on the forefront of this
    latest frontier in the global 21st Century economy.
        We cannot fall behind in digital trade, because we have so
    much to offer and so much at stake. There are hundreds of
    thousands of U.S. small businesses in nearly every sector, from
    manufacturing, to financial services, to mining, to
    agriculture, and food, in every single state and every
    Congressional District across the country that are harnessing
    the power of the internet and technology to reach new customers
    around the world. This is no small niche or part of our
    economy.
        Just look at all the facts: Digital trade accounts for more
    than half of all U.S. service exports. Digital trade is
    responsible for nearly 6.7 million American jobs. Nearly half
    of all U.S. companies have an online trading relationship with
    the EU, and the U.S. runs a $159 billion trade surplus in
    digitally deliverable services.
        Earlier this year in the House, as Senator Lee mentioned, I
    launched the Bipartisan Digital Trade Caucus, along with my
    colleague Suzan DelBene from Washington State. Our goal is to
    work with government, with industry, and with other
    stakeholders to ensure that the world follows our lead, the
    United States' lead, in promoting the free flow of digital
    commerce.
        I am very thankful that Chairman Tiberi and Vice Chairman
    Lee have taken it upon themselves to use our Committee for that
    purpose, as well.
        I want to thank our witnesses for participating in today's
    hearing to share their perspectives on a very important issue,
    and thank you, Vice Chairman Lee, and I yield back.
        Vice Chairman Lee. Senator Heinrich.

     OPENING STATEMENT OF HON. MARTIN HEINRICH, RANKING MEMBER, A
                      U.S. SENATOR FROM NEW MEXICO

        Senator Heinrich. Thank you, Vice Chairman Lee, and thanks
    to our panel for joining us here today. E-commerce touches
    industries across all sectors of the economy, and Americans
    across the country. It is a key source of American jobs in the
    21st Century, and its importance will likely only grow with
    time.
        We know that the internet enables U.S. companies big and
    small to more efficiently reach markets around the world.
    Manufacturers, banks, retailers, airlines, farmers, and a range
    of other businesses rely on the internet to seamlessly access
    and move data across borders.
        The internet has fundamentally transformed our lives and
    the way that we purchase goods. The benefits of international
    trade used to be concentrated among big business. The internet
    changed that, opening doors to small and mid-sized businesses,
    and even one-person shops.
        Now an individual with a broadband connection can sell his
    or her goods and services all over the world, from an artisan,
    from Acoma Pueblo, to a game designer from Albuquerque, or a
    chili farmer from Hatch. They can all now enter the global
    market.
        A recent study found that 95 percent of U.S. small and
    medium businesses on eBay export, and 190,000 of those firms
    export to four or more continents.
        The United States is an E-commerce leader today. The
    International Trade Commission estimates that digital trade
    contributed more to gross domestic product than all but four
    states in 2011, and has lifted wages by as much as 5 percent,
    while adding up to 2.4 million more full-time jobs.
        In New Mexico we are working hard to ensure that the
    opportunities of the digital economy reach into every corner of
    the State. I am excited to welcome Facebook, which is scheduled
    to open a multi-building data center next year in Los Lunas
    that will generate more than 100 permanent jobs at the data
    center, and up to 1,000 construction jobs.
        With 2 billion monthly active users, Facebook is literally
    built on cross-border data flows. To fully realize the gains
    from digital trade we need to ensure that global policies
    enable companies to harness the power of the internet to reach
    new customers around the world.
        For this to happen, it is vital that we have a free and
    open internet with privacy protections. And that starts right
    here at home. Your personal information should not be shared or
    sold without your consent. Your health, financial, and other
    personal and sensitive information must be protected. While
    internet providers must be prevented from selling users'
    personal information without user consent, companies should be
    able to choose where to store data.
        When U.S. companies cannot store data in the U.S., they
    lose out on jobs and the ability to use the data to improve
    their products and services.
        As far as we've come with the number of internet users
    worldwide tripling in the past decade, we are still in the
    early stages. And the opportunities for E-commerce domestically
    and internationally are unlimited.
        But to realize the potential the internet provides, we need
    to accelerate the deployment of broadband and ensure that rural
    America and tribal communities in our country have greater
    access.
        Right now 4 in 10 rural residents lack broadband access.
    And among rural tribes, that number climbs to 7 in 10 without
    access. To help bring more Native American students online, I
    will soon introduce legislation that promotes broadband access
    for students and tribal community centers.
        During a meeting I convened at the Santa Fe Indian School
    recently, the Tribal Administrator of Santa Domingo Pueblo in
    New Mexico, Everett Chavez, put it this way:
        ``Access to the internet is new, but it is an equally
    essential infrastructural need to our tribal communities, equal
    as water, power, telecommunications, or roads.''
        It doesn't matter if you are a student, a rancher, a
    manufacturer, a teacher, a doctor, or a small business, high-
    speed internet is now critical to thriving in the economy of
    today, much less the future.
        Finally, as we focus on digital trade today we should be
    clear that this is just one piece of a bigger issue. We need to
    be vigilant to evolve the rules of the road when new
    technologies are developed and deployed, and to protect our
    workers from countries seeking advantages through unfair trade
    practices.
        Mr. Chairman, I look forward to hearing from our panel, and
    I want to especially thank Former Ambassador Daniel Sepulveda,
    the witness that I invited, for being here today.
        [The prepared statement of Senator Heinrich appears in the
    Submissions for the Record on page 30.]
        Vice Chairman Lee. Thank you very much, Senator Heinrich,
    and thanks to each of you for being here. I am now going to go
    through and introduce our witnesses.
        We will start with Mr. Daniel Griswold, who is a Mercatus
    Center Senior Research Fellow, and Co-Director of the Program
    on The American Economy and Globalization. Mr. Griswold is a
    nationally recognized expert on trade policy. Prior to his
    position with Mercatus, he served as president of the National
    Association of Foreign Trade Zones, and before that as the
    Director of Trade and Immigration Studies for the Cato
    Institute. He holds a Bachelor's Degree from the University of
    Wisconsin at Madison, and a Masters in Politics of the World
    Economy from the London School of Economics and Political
    Science.
        Mr. Griswold, thank you for your work and welcome.
        Sean Heather is Vice President of the U.S. Chamber's Center
    for Global Regulatory Cooperation. He also serves as Executive
    Director for both International Policy and Antitrust Policy.
        During his 17-year career at the Chamber, he has worked on
    a number of diverse issues such as international trade and
    investment, taxes, standards, technology, and corporate
    governance. Before joining the Chamber, he worked for the
    Illinois Comptroller and with several political campaigns
    across the State. He holds an undergraduate degree and an MBA
    from the University of Illinois.
        Mr. Heather, thank you for joining us today.
        And now I will pass it off to Representative Paulsen from
    the Great State of Minnesota to introduce our next witness.
        Representative Paulsen. Thank you, Vice Chairman Lee. It is
    my pleasure to introduce fellow Minnesotan Nick Quade. Nick is
    the General Manager of Lino Lakes-based Relay Networks. It is a
    provider of network, wireless, and telecom equipment.
        In his role, Mr. Quade oversees the day-to-day operations
    of the business, and he deals first-hand with digital trade on
    a daily basis. As a result of his hard work, as well as that of
    his co-workers, Relay Networks currently holds a 100 percent
    positive feedback rating on its eBay store. This is another
    excellent example of how American entrepreneurs leverage the
    digital economy.
        Mr. Quade, thank you for taking time out of your busy
    schedule to join us here today. I know Senator Klobuchar, who
    is also a member of this Committee, and I often welcome
    Minnesotans who are at the forefront on leading issues.
        Thank you again, Vice Chairman Lee. I yield back.
        Vice Chairman Lee. Thank you. Finally, we will introduce
    Ambassador Daniel Sepulveda, who served as Deputy Assistant
    Secretary of State and U.S. Coordinator for International
    Communications and Information Policy under the Obama
    administration.
        Prior to joining the State Department in 2012, Ambassador
    Sepulveda served as a senior advisor and a member of Senator
    John Kerry's senior management team. Before joining Senator
    Kerry's office in 2009, Ambassador Sepulveda served as an
    Assistant U.S. Trade Representative, leading a team that
    managed Congressional affairs for the U.S. Trade Representative
    Ron Kirk.
        He has dealt first-hand with the negotiations we are about
    to discuss. Ambassador Sepulveda, thank you very much for
    joining us.
        Okay, we are now going to hear from each of our witnesses,
    and we will start with you, Mr. Griswold.

     STATEMENT OF MR. DANIEL GRISWOLD, SENIOR RESEARCH FELLOW AND
        CO-DIRECTOR OF THE PROGRAM ON THE AMERICAN ECONOMY AND
      GLOBALIZATION, MERCATUS CENTER AT GEORGE MASON UNIVERSITY,
                             ARLINGTON, VA

        Mr. Griswold. Chairman Lee, Ranking Member Heinrich, and
    members of the Committee, thank you for inviting me to testify
    today on the important topic of digital trade,.
        Digital trade is transforming the way Americans do business
    with the world. It is already delivering more choice and value
    to consumers, more opportunities to American companies of all
    sizes, higher wages for American workers, and faster, more
    dynamic growth for the U.S. economy.
        World-wide cross-border internet traffic has soared 500-
    fold since the year 2000. That's according to the McKinsey
    Global Institute, and it will expand another 8-fold in the next
    decade.
        In my remarks this morning, I plan to briefly describe the
    scope of digital trade, its growing impact on the U.S. economy,
    and what policies we should pursue to realize its full
    benefits.
        Digital trade can range from video streaming, to ordering
    merchandise through online platforms, to organizing complex
    global supply chains. The growth of digital trade plays to
    America's comparative advantage. The U.S. remains the global
    leader in creating digital products and online platforms, and
    exporting digital services.
        In fact, more than half of the services we export are now
    digitally delivered. Digital trade is empowering small- and
    medium-sized enterprises to sell and source in global markets.
        On eBay, 97 percent of the commercial sellers are selling
    to international markets. Almost 300,000 U.S. companies are now
    exporting to foreign markets, according to the U.S. Census
    Bureau, and that's a 50 percent increase since 1997.
        Global supply chains are becoming even more efficient,
    thanks to digital trade. Such technologies as radio frequency
    identification and block chain are facilitating just-in-time
    inventory and reducing delays at ports. The U.S. International
    Trade Commission estimates that the internet has reduced the
    cost both of exporting and importing in digitally intensive
    sectors by an average of 26 percent.
        This phenomenon is having a measurable and positive effect
    on the U.S. economy. As has been noted, the USITC estimates the
    enhanced productivity and lower cost because of cross-border
    digital trade has boosted U.S. real GDP by as much as 4.8
    percent; real wages by as much as 5 percent, with no net job
    losses to the overall U.S. economy.
        Reaping much of the benefit of digital trade has been
    small- and medium-sized U.S. enterprises. These so-called micro
    multinationals are reaching global customers through their
    websites and common online platforms such as eBay and Amazon.
    They can process payments digitally and ship products directly
    to individual customers around the world through private and
    postal package delivery services. Digital trade has allowed
    SMEs to source components and business-to-business services in
    global markets, empowering them to better control costs and
    enhance the competitiveness of their exports.
        The impact of digital trade is not a one-time shift, but an
    ongoing process that enhances the dynamic long-term growth
    potential of the U.S. economy. By reducing costs, spurring
    competition, and expanding markets, digital trade creates
    ongoing gains in efficiency that fuel productivity. By
    facilitating the spread of ideas and collaboration, digital
    trade contributes to product innovation. And by playing to
    America's competitive strengths, digital trade allows us as a
    Nation to use our physical, intellectual, and human capital in
    ways that permanently boost our gross domestic product and
    general living standards.
        Now despite the dynamic growth and benefits of digital
    trade, significant barriers remain to prevent Americans from
    reaping its full advantages. To realize those gains, Congress,
    in your trade promotion authority legislation from a couple of
    years ago, has directed the Administration to seek trade
    agreements with other nations that would, among other
    objectives--and I think these are very good objectives--ensure
    nondiscriminatory treatment of physical goods in the digital
    trade environment; prohibit forced localization of servers;
    prohibit restrictions to digital trade and data flows; prohibit
    duties on electronic transmissions; and ensure that legitimate
    regulations affecting digital trade are the least trade
    restrictive as possible.
        And I think you will be hearing a lot about this today, but
    let me just add my endorsement of it: Congress should also seek
    higher, more economically and commercially realistic de minimis
    thresholds for E-commerce shipments to other countries.
        Removing these last remaining barriers to digital trade at
    home and in other countries will allow more American consumers
    and companies to realize the full benefits of a more
    digitalized economy and global trading system.
        Thank you, and I look forward to your questions.
        [The prepared statement of Mr. Griswold appears in the
    Submissions for the Record on page 32.]
        Vice Chairman Lee. Thank you, Mr. Griswold.
        Mr. Heather.

       STATEMENT OF MR. SEAN HEATHER, VICE PRESIDENT, CENTER FOR
       GLOBAL REGULATORY COOPERATION, U.S. CHAMBER OF COMMERCE,
                             WASHINGTON, DC

        Mr. Heather. Good morning. It's a pleasure to be here. And
    the Chamber thanks you all for holding today's hearing.
        The United States has positioned itself as a leader in
    digital trade. However, our leading position is not assured, as
    foreign governments are trying to create their own Silicon
    Valleys by implementing policies that often serve as regulatory
    barriers.
        The ability for data to flow through the global economy is
    as important as the ability to move goods, services, or
    capital. However, data flows are increasingly threatened by
    data localization requirements. For example, the government of
    Indonesia currently has 10 different pending regulations that
    would require data localization.
        In Europe, France and Germany are increasingly promoting
    the use of sovereign clouds to limit the market access
    opportunities for American companies. China and Russia have
    encouraged indigenous innovation through local content
    requirements. For instance, Russia grants preferential
    treatment for domestic ICT companies when considering
    government procurement contracts. And in China last year alone
    more than 30 measures were introduced across various
    industries, including many ICT specific standards.
        Turning to data protection, more than 95 jurisdictions
    currently have data protection legislation. Sixty-eight of
    these jurisdictions are currently revising their data
    protection rules. While privacy standards are necessary in
    order to ensure consumer protection, consumers also demand the
    mobility of data to bring them the best products and services.
        Too frequently privacy regimes can create difficulties for
    companies conducting business in-country and across border. A
    good example is the EU's General Data Protection Regulation.
        GDPR represents an immense regulatory challenge that has
    consequences for EU competitiveness and for American firms
    doing business in the European Union. GDPR's impact extends to
    Latin America where it serves as a template.
        For example, Brazil, Argentina, and Chile currently have
    draft data protection bills pending which holds elements in
    common with GDPR. And other measures across Latin America
    include data transfer language that could serve as a
    significant barrier to digital trade. Some bills provide a list
    of countries whereby data transfers are permitted.
    Unfortunately, the United States is often not included on those
    lists.
        While regulatory challenges can impede digital trade, the
    motives aren't always easily discernible to label and clear
    attempts to obfuscate trade commitments. That said, many
    countries have cited privacy concerns as a basis for requiring
    foreign companies to store data within national borders. In
    these instances, privacy regulation becomes a forced
    localization requirement.
        Like privacy, we now see a growing patchwork of
    cybersecurity regulations that present compliance challenges
    and also hold the potential to mask protectionist motives.
        And finally, intellectual property protection. Too often,
    forced localization measures require tech transfers as the
    price to gain entry in a local market, and piracy, too,
    represents a well-documented drain on our competitiveness and
    it adversely impacts digital trade.
        In closing, let me offer the following recommendations:
        First, we need to prioritize digital issues as central to
    our trade and investment policy agenda. It is our understanding
    that Ambassador Lighthizer and USTR are doing this as part of
    the NAFTA Modernization efforts.
        We believe any agreements should, at a minimum, one,
    prohibit discrimination and secure market access for U.S.
    technology companies, products, and services.
        Two, ensure the ability to move data across all borders for
    all sectors.
        Three, combat national policies that require the use of
    local technology infrastructure or requirements to transfer
    source code or compel access to algorithms.
        Four, facilitate regulatory environments that encourage
    innovation through smart and effective approaches to privacy
    and cybersecurity, data collection and analysis. Finally, even
    traditional issues like Customs play an important role in
    digital trade given the E-commerce boom previously discussed
    and the need to modernize de minimis.
        Secondly, we need to look on the enforcement side of the
    ledger. We should consider what trade tools are appropriate to
    address digital barriers. KORUS offers us a success story on
    enforcement. In 2015 through a consultative mechanism created
    under the agreement, the U.S. and South Korea were able to
    discuss and resolve regulatory concerns that restricted data
    flows. Today while some data flow challenges remain, South
    Korea has one of the more open data flow regimes in the world.
        Three, we need to advance more workable arrangements that
    bridge national privacy regimes between the United States and
    our key trading partners. The United States should continue to
    support the U.S.-EU privacy shield framework and APEC Cross-
    Border Privacy Rules.
        Four, it is important that the Department of Commerce and
    State Department's Digital Office's program continue.
        These programs should be used to drive U.S. competitiveness
    by promoting U.S. digital exports and advocating for the
    adoption of friendly digital regulatory frameworks in foreign
    markets.
        And five, we need to do a better job of actively engaging
    in shaping foreign laws and regulations. U.S. regulators, not
    trade negotiators, play an important role outside of trade
    agreements in seeking opportunities to influence foreign
    regulators. Involving them to help prevent and combat
    regulatory barriers is going to be crucial going forward.
        In conclusion, I thank the Committee for the opportunity to
    testify and look forward to answering your questions.
        [The prepared statement of Mr. Heather appears in the
    Submissions for the Record on page 37.]
        Vice Chairman Lee. Thank you, Mr. Heather.
        Mr. Quade.

    STATEMENT OF NICK QUADE, GENERAL MANAGER, ECOMMERCE DIVISION OF
                  RELAY NETWORKS, INC., DEEPHAVEN, MN

        Mr. Quade. Thank you, Members of the Committee, for holding
    this important hearing today.
        I am the General Manager of Ecommerce Division for Relay
    Networks Minnesota. We provide domestic and international
    customers with access to functional and affordable indoor/
    outdoor wireless networking equipment. We leverage
    relationships with major universities, school districts,
    industry leaders to source and sell our products when their IT
    equipment comes out of service. By refurbishing this equipment,
    we are extending the life of these items that would otherwise
    end up as e-waste or could possibly end up in a landfill.
        Our business is expanding quickly, and demand, especially
    internationally, is currently outpacing supply. In this
    volatile retail environment, small businesses like us must have
    an E-commerce presence to survive and compete. I have worked in
    the E-commerce field for nearly 10 years now and know that E-
    commerce is the future of commerce.
        Our product reaches the entire globe through platforms of
    eBay and Amazon. These platforms further expand the multi-
    billion dollar networking business to a customer base that even
    five years ago wasn't possible.
        Twenty percent of our sales are exports to customers in
    over 50 countries, which expands from Switzerland all the way
    to Australia. The education field internationally is one of the
    largest in terms of demand. Relay Networks is an example of the
    many thousands of small American businesses that are
    benefitting from and growing on top of the global digital
    economy.
        We are using digital tools to reach customers that again
    were previously inaccessible for a business of our size. I
    believe that much of that economic benefit is being realized by
    small businesses that are in turn creating jobs in their local
    communities.
        Unfortunately, there are critical barriers to further
    driving this growth, and governments are slow to catch up with
    an industry that has grown 45-fold from 2005 to 2014. While the
    U.S. has withdrawn from the Trans Pacific Partnership
    Agreement, the digital trade provisions that sought to remove
    barriers to digital trade were positive for my business. But
    TPP fell short in one critical way. It did not compel countries
    to increase their Customs de minimis thresholds which are the
    country-by-country thresholds below which international buyers
    can import items duty and tax free.
        Congress took the right steps to increase the U.S. de
    minimis threshold to $800 in the Trade Facilitation and Trade
    Enforcement Act, but now we need to encourage our trading
    partners to do the same.
        Now that we are post-TPP, we should look to use trade
    policy making to both advance the positive digital trade
    provisions that were in the TPP, as well as the Sense of
    Congress that were included in the Customs Reauthorization
    Bill, and the current NAFTA negotiations are a perfect place to
    start.
        Our neighbors to the north in Canada have a $20 de minimis
    threshold, which means that Canadian Customs officials can
    intercept, open, delay, and assign levies to my sales. Needless
    to say, this does not promote a good buyer experience and
    compromises my relationship with that buyer.
        Furthermore, Canada's threshold was set in 1985 when I was
    three years old. And according to the neo-MacDonald of the CBC
    News, Ottawa spends $166 million a year to collect $39 million
    in taxes and duties. It's quite astonishing.
        On the Canadian side, this policy amounts to a
    protectionist move that puts every consumer at a disadvantage.
    And on the U.S. side, this is a trade barrier that hurts small
    businesses the most.
        The demand for electronics and networking equipment no
    longer needed in our market is in high demand overseas. We need
    to bring these dollars back into the U.S. as fast as possible
    to maximize value. While 20 percent of my sales today are to
    international customers, I know they would grow if digital
    trade barriers like the de minimis thresholds were taken down.
        Just recently, deals were lost because of fees involved.
    This included a resort in Canada that we were working with that
    wanted to upgrade their network, several schools in Latin
    America, and a teacher in the UK that wanted to replace her
    broken laptop, but because of a 20 percent plus increase in the
    fee, she couldn't afford the unit. These are just several of
    numerous examples. Thank you again for the opportunity to share
    my views with the Committee, and I look forward to answering
    all your questions.
        [The prepared statement of Mr. Quade appears in the
    Submissions for the Record on page 50.]
        Vice Chairman Lee. Thank you.
        Ambassador Sepulveda.

    STATEMENT OF HON. DANIEL ALEJANDRO SEPULVEDA, FORMER AMBASSADOR
         AND DEPUTY ASSISTANT SECRETARY, U.S. COORDINATOR FOR
       INTERNATIONAL COMMUNICATIONS AND INFORMATION POLICY, U.S.
                  DEPARTMENT OF STATE, WASHINGTON, DC

        Mr. Sepulveda. Mr. Vice Chairman Lee, Ranking Member
    Heinrich, Members of the Committee, thank you very much for the
    opportunity to testify here today.
        The digital economy and the preservation of the open global
    internet may feel like an issue that is somewhat removed from
    the daily lives of your constituents, but it is not. It is
    central to their success in today's economy, and it is central
    to our ability as America to lead the world going into the 21st
    Century.
        Our responsibility at home is to invest in making world-
    class broadband and digital skills accessible to all Americans,
    and work abroad to protect and preserve the global internet as
    a force for the democratization of opportunity and commerce.
        Farmers, ranchers, small manufacturers throughout America,
    are using digital platforms and services to engage in
    international trade. They are also leveraging digital
    information management tools as springboards for innovation,
    increased efficiency, and improved productivity, which is
    making them more competitive globally.
        Tourism operators are using Airbnb, Expedia, and other
    platforms to attract international visitors to cities and
    venues that are not as well known as New York City or
    Disneyland.
        As a result, places like Santa Fe, or the Rock & Roll Hall
    of Fame from the Chairman's home State, in Cleveland, are now
    attracting more international visitors, creating opportunities
    for working families.
        In the digital space, the United States is leading the
    world. But to stay there, we need three things:
        We need a clear digital trade strategy--and I fully endorse
    the arguments made by my fellow panelists. We need to make the
    right investments at home. And we need to ensure that every
    American can participate in the global digital economy.
        The Congressional Research Service has released an
    excellent report in June that lists the policy venues where
    these sorts of issues are being debated, many of which I've
    participated in, from the WTO to the G-7 and G-20 gatherings,
    which are issuing annual digital ministerials, to the OECD and
    the United Nations, and in our bilateral engagements, digital
    trade and the open internet need to be a high priority.
        Having appointed Senate-confirmed officials representing
    America's digital interests abroad is going to be critical to
    our success. As Commerce former Deputy Secretary of Commerce
    General Counsel Cameron Carey wrote recently, many of the key
    posts in this Administration for successful advocacy abroad are
    still unfilled.
        That is understandable in the first year of an
    Administration, but we do need to make that a priority going
    forward.
        In addition to our work abroad, we do have to do a better
    job at home creating constructive solutions the challenges of
    the digital economy create, even as we celebrate its success.
        The reason that many of the risks abroad that are being
    created are due to--are rooted in fear. They are rooted in fear
    of cybersecurity threats. They're rooted in fear of privacy.
    They're rooted in fear of disruptions to local labor markets,
    to the relationship between government and the market.
        To instill trust in digital trade and the sense that it is
    working for all, we need to team with our technology community
    to bridge the digital divide at home and help bridge it abroad,
    and address new challenges that the digital economy is
    creating.
        The United States needs to lead the way with workable
    solutions to these challenges or we will end up dealing with a
    global patchwork of laws and regulations that end up doing more
    harm than good, and splintering the global internet.
        In some countries, the sharing economy, artificial
    intelligence, and robotics will face impossible restrictions
    due to fear of labor disruption, and if we do not show them how
    to transition the displaced due to technology at home, they
    will not have the proper roadmap for how to deal with
    displacement in their own communities.
        And as Europe has indicated, without mutual recognition for
    our respective structures for protecting consumer privacy,
    there will be calls to close off data from transfer abroad. In
    fact, I think the most pressing and immediate challenge to the
    health of digital trade is the preservation of the EU-U.S.
    privacy shield to ensure that transatlantic data flows are not
    hindered.
        The EU is by far our largest digital trade partner, and our
    systems for governing the digital economy need to remain
    interoperable.
        In closing, it is also critical that we protect network
    neutrality at home to send the message abroad that services and
    applications delivered over the global internet must remain
    free from discriminatory treatment by local and national
    broadband internet service providers.
        Repealing network neutrality regulation at home without a
    legislative replacement will not help us to argue abroad that
    the pipes entering homes and businesses in China, India, and
    Brazil should remain open to our services on a
    nondiscriminatory untariffed basis.
        Our kids take the global internet for granted and
    everything it makes possible. As leaders, we cannot. It is up
    to us to make sure that they can benefit from digital trade and
    a digital economy that works for them and remains a force for
    progress for decades to come. I thank the Committee and my
    fellow panelists, and I welcome your questions.
        [The prepared statement of Mr. Sepulveda appears in the
    Submissions for the Record on page 52.]
        Vice Chairman Lee. Thank you very much to each of you for
    your remarks.
        I will begin the round of questioning, and then we will go
    in order of--in the following order. I will raise questions,
    then Senator Heinrich, Representative Paulsen, Senator Peters,
    Senator Klobuchar, Representative Delaney, and Representative
    Beyer.
        At the outset of my questions, I would like to ask each of
    you to identify a couple or three policies that you would adopt
    if you were king for a day. Let's say if you were in Congress
    for a day. A couple or three policies that you would put in
    place if you could make that change, to prioritize, advance,
    and protect digital trade.
        And we'll start in the opposite order from last time. So
    we'll start with Ambassador Sepulveda and then move to the
    other end of the table.
        Mr. Sepulveda. I think you're going to get a fair amount of
    agreement on the panel in terms of international policies
    specifically.
        First of all, we would advocate at every international
    gathering to ensure that data localization wasn't used in an
    anticompetitive manner.
        Second, I think that we would all work to bridge the
    digital divide abroad. That would mean, there are 3.2 billion
    people connected to the internet today. That means there are
    close to 4 billion people who are not. And that's a market that
    we could be reaching in this particular space where we are such
    a leader.
        And then at home I would do everything we could to bridge
    the digital divide. I think the move towards making significant
    investments in infrastructure at home should include an effort
    to connect the 23 million Americans in rural communities that
    are not yet connected at broadband speed.
        So those would be my three.
        Vice Chairman Lee. Thank you.
        Mr. Quade.
        Mr. Quade. King for a day? That sounds excellent.
        Well, an $800 minimum threshold universally would be
    incredible. Not only would we be able to reach consumers, but
    we would have a business-to-business number there, too. As our
    average is about $180, but $800 is where we're at. I'd love to
    see that universal. That would be incredible to break all of
    those barriers to make transactions seamless.
        In America we're used to seamless transactions where you're
    able to order something. It gets there, and we don't think
    twice about it. But all of a sudden you cross borders, and it's
    a whole other process. But again, since most individual
    consumers don't buy products overseas, they're not necessarily
    that familiar with it. So $800 is great.
        And to the Ambassador's point, the 23 million people that
    don't have high-speed access, let's get everybody access.
    Because it will allow them the opportunity to again open up
    small businesses like ours in Minnesota. Or, for that matter,
    an individual who has an idea, that has a product, now using
    platforms like eBay or Amazon they can show that product to the
    entire world and change their life.
        So those would be the two.
        Vice Chairman Lee. Mr. Heather.
        Mr. Heather. I will agree with what everybody else says,
    I'm sure, but let me give you a nontraditional answer. I think,
    while this hearing is on trade, I think what my answer is: What
    can we do to address regulation around the world? And a
    committee like this that has a horizontal responsibility to
    think about economics and policy, these challenges we see
    facing--take vehicles. Who is responsible for going out and
    pushing good regulatory frameworks in foreign markets to ensure
    that the vehicles that have rolled out in those countries are
    set up in a way in which we can compete?
        There's a huge role here that goes beyond commerce and
    state and USTR, that goes to NHTSA, that goes to the mainline
    regulatory agencies that this Congress created in many cases a
    hundred years ago before there were international markets.
        And these regulatory agencies all have offices of
    international affairs, but they aren't central to the
    policymaking function of these agencies. They are not equipped
    to go out and engage with a mandate to advance U.S. commercial
    interests. Not to say they should go out and advance U.S.
    commercial interests above their mandate for health and safety
    and environmental protection. Those things are obviously
    paramount. But once we've decided on a regulatory model we
    think works here, why aren't we out there advocating it to the
    rest of the world?
        So one of the things I would do is I would take the silo
    approach to the way we think about issues here in Washington
    and try to bring about a more consolidated approach within
    particularly the Executive Branch with the support of the
    Congress in bringing our regulators to advance some of these
    concerns abroad.
        Vice Chairman Lee. Mr. Griswold.
        Mr. Griswold. Mr. Chairman, thank you. That's a great
    question. First, I think a universal $800 de minimis would be
    great. How do you get there? You know, we had a successful
    trade facilitation agreement in the World Trade Organization.
    That seems to me maybe one approach. Maybe amending that
    agreement.
        We have a World Customs Organization. Maybe discussions
    there. Most countries in the world have a de minimis standard
    under $200, so there's some heavy lifting there, and I think
    negotiations are the way to do that.
        The Trade Promotion Authority bill that Congress passed in
    2015, all those negotiating objectives are important. We
    basically have our digital policies down correctly in this
    country. I don't always say that about U.S. policy, but I can
    say that here.
        The problem is largely in other countries. How do you get
    them to address that? It's through negotiated agreements.
    Chapter 14 of the Trans Pacific Partnership remains the best
    template we have available. And I think maybe in the
    renegotiations of NAFTA that should be an objective, along with
    talking to our Canadian friends about their de minimis
    standard.
        The Korean Free Trade Agreements, according to a survey by
    the Congressional Research Service, has the most robust digital
    trade provisions of any agreement we've signed. Currently, I
    think for many reasons, walking away from the Korea Agreement
    would be a huge mistake, but digital trade would be one of
    them.
        So that's my wish list, if I were king for a day.
        Vice Chairman Lee. Thank you.
        Senator Heinrich.
        Senator Heinrich. Any trade agreement that the Trump
    administration enters into should help strengthen export
    opportunities for U.S. businesses, level the playing field, and
    ensure that trade agreements are fair for everyone,
    particularly American consumers, businesses, workers, farmers,
    and ranchers. I'll ask this in particular to Ambassador
    Sepulveda and Mr. Griswold, but any of you are welcome to chime
    in afterwards.
        As we embark on a renegotiation of the NAFTA Agreement, or
    should I say as the Administration does, what are some of the
    U.S. offensive interests in the digital trade space for our
    small businesses and manufacturers? Where should U.S.
    negotiators focus their attention?
        Mr. Griswold. Would you like me to go first?
        Senator Heinrich. Sure. You bet.
        Mr. Griswold. First, Senator, thanks for mentioning
    consumers. You know, that list gets mentioned a lot, ranchers,
    farmers, small businesses; consumers are sometimes forgotten.
    So my compliments to you for mentioning that, because consumers
    have an interest in digital trade, in trade generally but also
    in digital trade.
        And I have to say--I am complimenting Congress a lot today
    when you raised, the de minimis standard to $800, that is
    probably one of the best things you have done for your
    constituents in the trade front in a long time.
        And I think on NAFTA----
        Senator Heinrich. Mr. Quade is nodding, for the record.
        [Laughter.]
        Mr. Griswold. In NAFTA, that should be part of the
    discussions. And they are going beyond just the strict
    guidelines of TPA. By the way, Mexico has a de minimis
    threshold of $300, but that is still significantly below where
    it should be. So I think that is what we should do in those
    negotiations.
        Senator Heinrich. Ambassador, do you want to jump in there?
        Mr. Sepulveda. I would endorse all of Mr. Griswold's
    negotiations. And I think it is also important to think about
    consumers in Mexico as well as consumers in the United States,
    the degree to which a product like the one from Relay that can
    be sold de minimis to a teacher to be able to teach his or her
    kids in Mexico.
        Senator Heinrich. Clearly that was the intention of the de
    minimis standard in the first place.
        Mr. Sepulveda. Right, right. That's very useful to everyone
    involved. And as was pointed out, it is highly inefficient to
    have a de minimis significantly lower than that. And it is a
    good signaling thing for us as the United States to have
    elevated our de minimis.
        Senator Heinrich. We have an incredibly open internet in
    the United States. I mean obviously the Russians can play on
    our internet, but there are a lot of countries that control
    content, very closely control who can have a website, what is
    on that website, what can be offered.
        What should our response be--and some of these countries
    are quite large trading partners of ours--what should our
    response be generally in terms of negotiations to that very
    different playing field domestically and abroad?
        Mr. Griswold, do you have a----
        Mr. Griswold. You know, you are getting into some sensitive
    areas about censorship and that sort of thing, and that is
    really beyond the scope of trade agreements. I think the
    biggest losers when countries adopt those policies are their
    own citizens. They are being deprived of information, both
    important political and other information, but commercial
    information. They are less educated shoppers in the global
    arena.
        So, one, we can set a good example. And I think we have, in
    this area. But also, negotiate as well as we can--that is where
    the language is important--that regulations be adopted in other
    countries regarding national security, cybersecurity, privacy,
    that are the least trade restrictive as possible. So maybe that
    is the pressure point that we should bring in negotiations.
        Senator Heinrich. Ambassador.
        Mr. Sepulveda. One of the things that we saw abroad was an
    effort by many countries to create import substitution
    strategies for the building up of their own digital economy.
        So everybody wants to have a Google App, a Facebook, and an
    Amazon, right? So what we advocated abroad was to say, do what
    you do well and make sure that your people can use the
    platforms to continue what they're doing to do it better. And
    import substitution strategy in this space is deeply
    destructive for them.
        The Boston Consulting Group, the World Bank, and others
    have shown that more open, better connected countries are doing
    better than those that are not. But there is to some degree
    abroad this feeling that the United States has first-comer
    advantage and that they're responding to that first-comer
    advantage by creating barriers to our firms being able to do
    well in their markets, to which we have argued and believe the
    evidence exists to say that actually having and using the
    platforms that the American economy has been able to create is
    useful for you.
        Senator Heinrich. Thank you all.
        Vice Chairman Lee. Representative Paulsen.
        Representative Paulsen. Thank you, Vice Chairman Lee.
        Mr. Quade, you and the other witnesses here today have
    presented some very valuable testimony about the importance of
    digital trade to American businesses and our economy.
        As I mentioned earlier in my opening statement, both
    Senator Klobuchar and I can attest to the numerous small
    businesses in particular in Minnesota that have shared that
    type of success story in engaging in the digital economy, and
    it is great to have you here.
        I am curious, as Members of Congress consider future
    legislation in this area, as we watch the Administration
    negotiate future trade agreements that include digital trade
    provisions, I think it would be helpful for this Committee to
    hear about some of the specific barriers you face.
        You outlined the de minimis component to digital trade that
    companies like Relay Networks face. What are some of the
    challenges that your company has come across as you try to
    reach customers abroad? And how can we help you in overcoming
    these barriers? Does anything come to mind?
        Mr. Quade. Congressman, it is not just the de minimis but
    it is also the Customs process as a whole. It is amazing how
    many times we have an international customer and the
    transaction seems seamless. I do not hear anything, you know,
    days later. And all of a sudden two, three weeks later an
    international customer will call me up and say, well, where is
    my product?
        Well now all of a sudden I have to get on the phone and
    call multiple different areas. It could be the shipping
    provider. It could be Customs. And spend hours trying to track
    down this product that is stuck somewhere in this process, and
    that includes countries like the UK.
        I can cite a specific example just recently where, you
    know, I must have spent two, three hours on the phone tracking
    down product, trying to find where it is. And this is, again,
    our partner in the UK.
        So in terms of barriers, it seems as though the whole
    processes just are slow. Products get lost. There are whole
    countries where we would just as soon not ship product to
    because we know that we are rolling the dice. One of those
    would be Russia, for example.
        But it seems as though these processes are just a
    nightmare. And I know specifically businesses that are involved
    in digital trade that simply do not offer their products
    internationally because they simply do not want to deal with
    it.
        And that, quite frankly, I think hurts those companies
    because if they open these products up, and we could simplify
    these, we can get this product that no longer has a market in
    the United States out of the United States and bring money back
    in.
        Representative Paulsen. So just pause for a minute.
    Essentially, you are emphasizing that we need to be proactive
    in combating some of these existing barriers that exist to
    digital trade. So just really quick, highlight what it has
    meant to Relay Networks. Digital trade has meant a lot to the
    success of your company and where you are going as a small
    business, the people you employ, but what has it meant to you?
        Mr. Quade. Since I have come aboard, we have nearly doubled
    the size of our employees. We have doubled our warehouse space.
    We have completely redone our processes in the back room so we
    can be more efficient, because we need to start handling the
    volume based on the demand.
        My phone blows up every single day with international
    customers wanting the stuff that no longer has a need here in
    our market. And that includes student-issued tablets. You know,
    Americans, we do not necessarily--not a lot of us need an
    iPad2. We want the latest and greatest. We want the iPadair,
    right?
        But an iPad2 in a Latin American country? This changes
    their life. Or network equipment that has come out of use at a
    major company. You put that in play in a school that has not
    had internet access before? It changes lives. And the demand is
    there.
        The supply is our challenge. So we need more equipment that
    has been sitting around in IT closets because of this
    international demand so we can bring that money, again, back
    into the United States. And so that I can keep hiring more
    people, so we can keep expanding our warehouse. It is extremely
    exciting. Every day I come to work I talk to the owner of our
    company, Darren Ashcroft, who is here with me today, and we are
    just so excited every day to come in and speak to new
    customers, the Netherlands, Chile, et cetera.
        So it is a very exciting time, Congressman.
        Representative Paulsen. Thank you, Mr. Chairman.
        Vice Chairman Lee. Senator Klobuchar.
        Senator Klobuchar. Thank you very much. I also welcome you,
    Mr. Quade. Not everyone has a Senator and a Congressman, so you
    are going to get all the questions now. But thank you for
    employing people in our State.
        I guess I will just ask you one question. And that is, that
    in July I joined my colleagues in calling on the USTR
    Ambassador to make small businesses a priority in trade
    negotiations by seeking to raise the de minimis threshold for
    goods and services that U.S. businesses can sell overseas.
        And as noted, right now up to $800 can be imported into the
    U.S. with no duties or tax, but a U.S. company would face a
    much lower threshold when exporting goods and services to
    another country.
        When we have 95 percent of the world's customers in foreign
    countries, there is a world of opportunity out there, as you
    point out. Can you talk about, expand on how making sure that
    increasing the de minimis level for developed countries can
    benefit small businesses?
        Mr. Quade. Sure. Again, when, Senator, you take down these
    barriers, it creates that seamless transaction that we are all
    used to here in the United States. And it also makes businesses
    like ours run more efficiently.
        So if these transactions can be more seamless, I do not
    necessarily have to spend all of my time, again, tracking down
    these products. Because I want to take care of these customers,
    but I also do not want to upset these customers. Congressman
    Paulsen talked about our 100 percent feedback rating on eBay.
    It is a lot of work to maintain that feedback. It is a lot of
    work to take care of these customers. But I am more than
    willing to do the hard work. But again, I can speak to numerous
    small businesses in Minnesota that are doing a large amount of
    volume that, again, do not have their products internationally
    because they do not want to deal with it.
        Senator Klobuchar. They do not want to deal with the
    threshold.
        Mr. Quade. Yes. You take those barriers down, all of a
    sudden these companies can start offering these products
    internationally and experience the same boom that we are
    experiencing at Relay Networks.
        Senator Klobuchar. Very good. Thank you.
        Mr. Heather, you talked about the Digital Attache Program
    in your testimony at the Commerce and the State Departments,
    and I have always been a big booster of the Foreign Service and
    the people that can help us provide help to companies both in
    our own country and what markets they can go into, and then of
    course in the Foreign Commercial Service. And then also the
    staff in the embassies. But the Digital Attache Program is
    relatively new. As you know, it helps U.S. businesses increase
    exports by helping them manage digital policy and regulatory
    issues.
        The digital attache programs were established in 2016. We
    have seen some proposed budget cuts of course from the
    Administration. How do you think these programs could be
    helpful if we kept them in place?
        Mr. Heather. Well, given the fact that most of the
    challenges we are talking about today are in foreign markets,
    if you do not have eyes and ears on the ground in real time to
    know what is happening either legislatively or regulatorily in
    these countries, there is not an ability to feed that
    information back into the broader U.S. Government in order to
    then come up with a response to what we see happening.
        And in our experience, even though this program is
    relatively new, we have done a significant effort to have
    regular conference calls with these folks who are on the
    ground, and have participation on many of these calls of over
    100 companies who are very eager to hear what is being seen by
    these Digital Attache officers. And also oftentimes it is our
    members who are able to tell the Digital Attaches things that
    they are not seeing, necessarily.
        So we have found the program, even in its infancy, to be
    very important and highly successful, and something we think
    there is the ability to leverage.
        I think that there are, on the Commerce side, somewhere--
    and Danny may need to help me here; I know you were at State--
    but I think we expanded it from 12 to 16, or from 9 to 12, or
    something like that. But we are in the most important and key
    markets, and State has amplified that effort by doing a lot of
    training and programming for their commercial officers, and
    many more embassies to be on the lookout for things like data
    localization, force tech transfer issues. So this is a program
    that is valuable.
        Senator Klobuchar. Thank you. One last question, Mr.
    Ambassador, very briefly. The importance of broadband
    deployment to the issues that we are talking about. We have the
    Broadband Caucus in the Senate. We have been working really
    hard to try to get infrastructure built to get more investment.
        Mr. Sepulveda. Thank you, Senator Klobuchar. And I want to
    echo the good work of the Digital Attaches, and we also created
    a Digital Economic Officers Program at the State Department. So
    every post has an economic officer. They are trained and
    knowledgeable on traditional economic issues, trade issues,
    customs issues, those sorts of things. But in the digital
    space, we needed to create a new curriculum and educational
    mechanism by which to ensure that our economic officers abroad
    are well versed in these issues, and we have done that through
    the State Department's Economic Bureau.
        And there has been some call for reducing the number of
    people at the State Department, and that is a real issue. To
    your broadband issue, the excitement that you see out of Relay
    Networks, the ability that they have had to succeed as a small
    business using their digital connectivity, needs to be extended
    to every small business in America.
        And there are far too many rural communities in particular,
    because of the cost of building networks out to those
    communities, that are not connected. Having something in the
    infrastructure build to help with those initial capital costs
    would be critical to making sure that the Universal Service
    Fund can then help, once it is built, those long-term costs.
    Blair Levine, who used to be with the FCC, has written a paper
    for Brookings making a specific recommendation for the
    infrastructure, whatever infrastructure stimulus is proposed,
    that I would strongly endorse and recommend to you.
        Senator Klobuchar. Thank you, very much.
        Vice Chairman Lee. Representative Comstock.
        Representative Comstock. Good morning. It is great to be
    with you here this morning. Sorry I was a little late, but, Mr.
    Griswold, I appreciate George Mason represented here, and
    Mercatus, and we appreciate your great work there. So with the
    widening use of digital technology, and with the internet
    lowering the cost of international trade, it helps our
    productivity, the kinds of things you have highlighted. Could
    you explain why this is not a threat? Why this is not a threat
    to other jobs? And why this is something that will really have
    a ripple effect for all kinds of industries? And maybe just
    paint a few pictures of some of the small- and medium-sized
    enterprises that will be able to expand and benefit in a way
    that is growing new markets, not in any way cutting into
    anybody's existing?
        Mr. Griswold. Yes. Thank you for that question.
        Yes, there is a lot of anxiety about jobs connected with
    trade, and I make the point in my testimony that this is not
    something radically new about the ``why'' of trade, it is about
    the ``how.'' So the same principles apply: International trade
    allows us to do more of what we are better at as a Nation, that
    plays to our strengths in terms of our high technology
    industries, and digital, and information technology.
        So in that sense, the internet is enabling trade to happen
    in ways it was not able to happen before, with all the benefits
    that it brings to our country.
        The U.S. International Trade Commission study is important
    in this respect. They talked about up to 4.8 percent larger
    gross domestic product, up to 5 percent higher real wages----
        Representative Comstock. What was the larger amount, the
    study?
        Mr. Griswold. Yes, that was the 2014 U.S. International
    Trade Commission Study on Digital Trade. And they estimated our
    GDP is larger by 3.4 to 4.8 percent, real wages of American
    workers in Northern Virginia and around the country are 4.5 to
    5 percent higher. They were more cautious on jobs. They said it
    is either 0 to 2.4 million, but I think the zero is an
    important factor, because trade is not about more jobs or fewer
    jobs; it is about better jobs. About jobs in areas that are
    growing, that play to our strengths.
        And I think digital trade plays to that. You mentioned
    small- and medium-size enterprises. The barrier to companies
    like Relay Networks getting into global markets in the past has
    been how to reach foreign customers, how to make foreign
    customers aware. Also, how to overcome something called
    ``Information Asymmetries.'' And that is, if you are a branded
    multinational, people can know your reputation, and they know
    where to complain. If you are a small- and medium-sized
    company, people do not know your reputation, and they are
    hesitant to take that plunge. But on the internet you can have
    things like customer reviews, which raise confidence. You have
    platforms like Amazon and eBay, and that has enabled small- and
    medium-sized companies to create jobs.
        So trade is like technology. You know, 200,000 to 300,000
    Americans line up for unemployment insurance every week in a
    low-unemployment economy, not primarily because of trade but
    because of technology and changing consumer taste. So jobs are
    created and jobs are eliminated through trade, through
    technology, but the bottom line is, it raises our productivity.
    It is creating opportunities for our children and workers in
    the future economy. And that is the important thing, and that
    is what digital trade is contributing to our economy.
        Representative Comstock. Okay, and what are some of the
    biggest regulatory threats that you see that would stymie the
    growth, or limit that entry level?
        Mr. Griswold. Yes, there are barriers to cross-border
    trade, and we have talked about a lot of them today in terms of
    force localization of servers, which by the way interferes with
    the cloud. For small- and medium-sized companies, the cloud
    computing is more important to them than it is to large
    companies that can have their own IT departments. But the cloud
    allows small- and medium-sized companies to buy those services.
    And that is why a forced localization of servers is something
    we need to resist and get into trade agreements.
        Domestically we need to have a flexible economy. We need to
    sort out our corporate tax system, which everybody agrees is a
    drag on growth. We need to invest in education in a way that
    prepares our workers to fill these jobs.
        I know it is beyond the scope today, but we need
    immigration reform so that high-skilled workers can come into
    the country and help us grow these high-tech companies, and
    create the innovative digital products that we can then export
    to the rest of the world.
        So it is a broad package, but you are exactly right. It is
    all part of a package of making our economy more flexible and
    opening up markets for opportunities.
        Representative Comstock. Okay. Thank you. And thank you so
    much for your work.
        Vice Chairman Lee. Representative Beyer.
        Representative Beyer. Thank you, Mr. Chairman, very much.
        I want to begin by saying, as an automobile dealer in my
    real life, 99 percent of our sales start online. So it is very,
    very out there.
        Mr. Heather, I want to thank you right off the top for
    pages 8 and 9. You have a very clear multi-page strategy for
    where our digital stuff should go. So thanks for putting that
    together.
        Ambassador Sepulveda, you say very eloquently that there is
    critically protected network neutrality at home. To send the
    signal to others that services and applications delivered over
    the global internet must remain free from discriminatory
    treatment by local and national broadband internet service
    providers. This is said eloquently.
        Can you expand on that? And the recently announced FCC plan
    to roll back the Title II designation on that neutrality, is
    that a step in the wrong direction for our digital trade?
        Mr. Sepulveda. Thank you, sir. I hesitated to mention that
    due to the fact that it is an issue that is being heavily
    debated in the Congress. The reason I mention it is because
    internet services are global in nature. That is to say that if
    you build--if Relay Networks puts up a website, it can reach
    any consumer anywhere in the world, as well as anyone else,
    right? Broadband internet service is provided locally. So that
    last mile, if your service or your speech is discriminated
    against in that last mile, it will hurt you. And that is the
    point of control that could be leveraged abroad against our
    providers. Now the signal that we sent, when we say that
    network neutrality is not going to be the rule of the land in
    the United States, sends that signal to other countries that it
    is okay for their broadband service providers to discriminate
    against content that isn't local or isn't originated in their
    country.
        So that is the biggest challenge. I think it sends a bad
    signal, particularly to repeal the rule without having a
    replacement in law. You can have an honest, and you will have a
    very strong debate and deliberation on what that should look
    like in law versus in rule, but I strongly support Chairman
    Wheeler's work. And I think it has sent the right signal
    abroad, and I know that you have done work with Chairman
    Wheeler on this in your own District and we appreciate that
    work.
        Representative Beyer. Thank you. Ambassador, the Korea-U.S.
    Free Trade Agreement was hailed as having the most modern and
    robust digital trade chapter in history. How would you assess
    the success of this a few years in? And aside from the obvious
    strategic and commercial impacts, can you discuss the impact of
    a course withdrawal on digital trade, both with Korea and
    internationally?
        Mr. Sepulveda. I think I would echo what my fellow panelist
    has said, that the Korea Agreement was very, very strong, as
    was the language in the TPP, which was not pursued.
        I think at the end of the day it would send a very poor
    signal to a very strong ally and a key commercial partner to
    withdraw from the Korea-U.S. Free Trade Agreement.
        Representative Beyer. Thanks. Mr. Heather, a similar
    question on NAFTA. So the original NAFTA obviously predated the
    centrality of the internet and digital goods. But NAFTA still
    governs North American trade and telecoms and digital goods and
    services of some status quo. So how important is the digital
    piece of the modernization negotiation that the President is
    talking about?
        Mr. Heather. Well we have every indication that the digital
    issues in the NAFTA modernization are a priority for Ambassador
    Lighthizer and the negotiations. I think when you look at the
    relationship the United States has with Canada and Mexico, save
    maybe de minimis, and maybe a couple other issues, we don't
    have a lot of the kinds of barriers I outlined in my testimony
    with either trading partner.
        But what NAFTA modernization represents is an opportunity
    to get the rules right. Yes, KORUS was a good start in the
    digital age. TPP built on that. But there are always new
    questions that are emerging in the policy space. For example,
    cyber and how cyber regulations are being promulgated around
    the world.
        We do not have a cyber challenge in terms of the regulatory
    environment in Mexico or Canada, but Canada and Mexico because
    they are good trading partners and good partners on strong
    policy represent an opportunity to get the rules right.
        So NAFTA, more so than sorting out challenges that we face,
    save de minimis, maybe a couple of other minor issues, Mexico
    and Canada and the United States have an opportunity in the
    NAFTA modernization to create a very high set of rules and
    standards that we would like to see pushed in other trade
    agreements around the world.
        And I would just say, since we have a lot of home cooking
    going on between Mercatus and the Congresswoman and my friend
    from Minnesota, I happen to be your constituent, sir.
        Representative Beyer. Thank you, Mr. Heather.
        So a quick follow-on. Canada has got the cultural exemption
    in NAFTA. Is that likely? Can we modify that? What can we
    achieve in the NAFTA renew issues?
        Mr. Heather. I am aware of it. I am not following that
    issue quite closely. The cultural exemptions are challenges in
    many cases for all kinds of content issues in Europe and
    elsewhere. They all are something USTR pushes back on from a
    market access standpoint. But I would have to follow up with
    you in terms of, with folks who are following that specifically
    as to what we might be able to achieve.
        Representative Beyer. Thank you. And thank all of you very
    much.
        Representative Paulsen [presiding]. Senator Lee had to
    leave, but we have time for another round of questions from
    Members who would like to ask. So, maybe I will just start with
    Mr. Heather, to follow up a little bit on that conversation.
        There are multiple avenues in which to pursue free trade
    with appropriately facilitating rules, and the WTO is one. Free
    trade agreements with individual or group countries is another,
    obviously. Each has its pros and its cons.
        Digital trade is also discussed at G-7 meetings and G-20
    meetings. Can you explain some of the pros and the cons of the
    various forums? Can you suggest which path or paths toward
    appropriate regulation are more promising and how the United
    States should prioritize them?
        Mr. Heather. It is a very good question, and I suspect you
    would get a lot of different answers to that. Let me say this.
    We have found conversations in the G-7 and the G-20 to be
    immensely challenging. And China's year of hosting the G-20, I
    think that was the first year that G-20 took on digital policy
    type issues.
        It was amazing, looking behind the curtain to the degree I
    had the ability to look behind the curtain, to see the kinds of
    efforts that were made not just by the Chinese but the
    Russians, as well as our European friends and allies. To not
    have what I would say to be very basic statements about having
    an open digital economy and free flow of data. That did not get
    any better this past year when Germany chaired the G-20.
        And so I think the G-20 and G-7 are very tough forums and
    represent tough sledding ahead for establishing consensus and
    good rules. I think we play a lot of defense, quite frankly, in
    both of those fora.
        When you look at the WTO, I think the WTO has a significant
    ministerial meeting coming up this fall. There have been some
    voices who have called for the WTO to get into the digital
    game, as being an area of expansion.
        I do not expect that the WTO will ultimately receive that
    mandate this fall. I think there is a view that the WTO has
    enough on its plate that it needs to work on before it tries to
    venture into new areas. But I think that is an area worth
    watching.
        And I think one agreement that we have not mentioned that
    has not had much attention in the transition from one
    Administration to the other, is TISA, which is a plurilateral
    agreement with a number of countries that is a real opportunity
    to set rules in the digital space, particularly for the
    Services environment.
        So I would put as a priority getting our act together and
    figuring out what we want to do with TISA, and pushing that in
    terms of the concept of establishing digital rules.
        Representative Paulsen. Ambassador Sepulveda, can you share
    some thoughts along those lines, too?
        Mr. Sepulveda. Sure. I thought that was an excellent
    presentation of where we are. I would say that the G-20 in
    particular is a challenging environment, and the G-7 creates
    some challenges as well, but we need to be there. We need to be
    making our arguments.
        And they also serve to telegraph to us what countries are
    thinking about doing domestically, and then we can engage on
    that level as well.
        I think it is critically important that some of the
    private, larger international organizations like the World
    Economic Forum and others, are entering this space. The Chamber
    has made this a priority. The International Chamber of Commerce
    has made it a priority as well.
        So there are various venues. When I was working at State,
    you could be traveling every week somewhere in the world to
    talk about this stuff. And we need to be engaged in all of
    them.
        Representative Paulsen. Mr. Griswold, I am going to follow
    up with one other question, because I know countries like
    France and Germany that are technologically advanced are
    heavily engaged in international trade, and at the same time
    they are adopting policies that are not necessarily trade
    friendly.
        Maybe you could give a couple of examples and their
    reasons. On the other hand, there are countries that seem very
    strongly oriented towards free trade, Singapore, for instance.
    Could you share that perspective and what examples we should be
    following?
        Mr. Griswold. Yes. First just a quick comment on how to
    achieve liberalization of digital trade. There are trade-offs.
    If you have an agreement at the WTO that benefits 160 countries
    but there is a lower common denominator of what you can
    achieve. So I continue to think bilateral and regional
    agreements have the most promise, and Chapter 14 of TPP remains
    the template.
        But, yes, our European friends are advanced in a lot of
    ways, but in some ways I think they have a little envy that
    they do not have an Amazon and an eBay and an Apple. And,
    frankly, you see some protections disguised as concerns over
    privacy and security. And I think we need to challenge them on
    that.
        So we need to continue to push them. It is in their
    interest to not require the localization of servers and things
    like that. It really enhances your own efforts at security if
    information can be located in multiple sources, not only in
    your own country but elsewhere, and in countries like the
    United States where we have very high security and
    technological standards. We need to make that case to them,
    that it is not only in our interest to open up your market, but
    it is in their interest to have a more diverse means of
    distributing information.
        Yes, Singapore is a good example, and we do have a
    bilateral trade agreement with Singapore that has some digital
    components. But they are a first-world country in that respect.
    You are finding that countries that understand the benefits of
    digital trade, as we do in the United States, are very willing
    partners to sign on with us.
        Canada and Mexico were ready to sign on to the Trans
    Pacific Partnership, so they embrace all the negotiating
    objectives of the U.S. Congress. So I think we have willing
    partners out there. We have some work to do with others.
        Representative Paulsen. Senator Heinrich, you are
    recognized.
        Senator Heinrich. Central to the U.S. leadership in E-
    commerce is our highly skilled workforce. To ensure that we
    build on our current strength there, we obviously need to
    invest in that workforce through quality education, things that
    work, job training, apprenticeships, other programs that equip
    our workers with skills needed to compete in that global
    economy electronically and otherwise.
        Last week the Administration announced its decision to end
    the Deferred Action for Childhood Arrivals Program, DACA.
    Starting with you, Ambassador, and I will just go across and
    get all of your thoughts, what is your assessment of how ending
    that program will potentially affect the U.S. economy and our
    ability to compete in coming years?
        Mr. Sepulveda. Thank, you very much, Senator, for that
    question. The technology community, and I think the corporate
    community, has spoken fairly uniformly on this. The estimates
    are that it will cost hundreds of billions of dollars to end
    the DACA program.
        And for the technology community, where so many in that
    community are either immigrants or the children of immigrants,
    this issue has hit very, very close to home. In fact, I think
    Brad Smith has said that this Congress should take up DACA
    legislation even before they move to tax reform, which is
    obviously something critically important to Microsoft.
        So as we move forward, being open to the world's talent,
    being respectful of all our children, and making sure that the
    corporate community has all the talent it needs available,
    because this is not a zero sum game. For us to succeed in the
    global economy, and for them to continue to innovate and grow,
    is incredibly critically important.
        Senator Heinrich. Does anyone want to add to that?
        Mr. Griswold. Senator, thanks for bringing that up. Free
    digital trade is necessary, but it is not sufficient. We have
    to have the educated workforce, the flexible domestic economy
    to take advantage and create the new products, and immigration
    is part of that.
        I know it is controversial, but we are facing a demographic
    issue in this country where the workforce is going to start
    shrinking without immigration because of declining birth rates,
    but we also have a challenge in terms of a trained workforce in
    the STEM subjects.
        You hear anecdotally and otherwise of U.S. companies that
    cannot hire the high-skilled workers they need. These are
    manufacturing companies as well as IT companies.
        As far as DACA goes, to me these young people are about as
    close to a sure bet as you can get. This is basically the only
    country they have known. They are fully Americanized in every
    sense in terms of the language and the culture.
        By definition they have graduated from high school. The
    older ones over 25, two-thirds of them are either in college or
    have graduated from college. Hundreds of them are working in
    high-technology companies. They have been fully vetted in a
    security point of view.
        I disagree with some of the economic statements that
    Attorney General Sessions made, but I think Constitutionally he
    is probably right. It is up to Congress to fix this problem.
    And I would just--you asked about my wish list. If I were king
    for a day, I would legalize the DACA young people.
        Senator Heinrich. It sounds like we should get on that.
        Mr. Griswold. I believe you should.
        Senator Heinrich. Mr. Heather, do you want to add to that?
        Mr. Heather. No, I couldn't improve on the Ambassador's
    statement.
        Senator Heinrich. Thank you.
        Representative Paulsen. Representative Comstock, you are
    recognized for five minutes.
        Representative Comstock. Mr. Quade, you had said in your
    testimony, and we talked about here, the TPP agreement did
    provide positive things there. Given we do not have that, how
    can we take the positive things there now and utilize them to
    help businesses--and actually for any of you who might have
    some thoughts on what we might do in an environment where
    unfortunately you have opposition from both sides on trade. And
    I think the testimony you are providing today shows why this is
    something that really can help both of those sides advance, and
    so the fear of it, how do we overcome that? And what are some
    of the ways that we could help advance the digital trade in a
    way that is inclusive and engages everybody?
        Mr. Quade. Absolutely. Mr. Griswold said that we could use
    that part of TPP as a template, you know, and carry that out in
    the future negotiations, including the current NAFTA ones.
        So if we use that as a template, and then we also bring it
    on an individual level like I was talking about earlier, the
    small businesses including our neighbors in Canada over here
    that I deal with, or the education field internationally that
    is looking to get connected. But that barrier from--because
    they are limited in capital, you know? So they are on tight
    budgets.
        Representative Comstock. So this is really like a micro
    enterprise assistance, if we were able to----
        Mr. Quade. Exactly.
        Representative Comstock [continuing]. Help here, and it
    would change sort of the whole dynamic of aid versus trade.
    This is another----
        Mr. Quade. Yes. That is a perfect way to think about it.
    Think about it as the easiest way that we can touch an
    individual and allow them the free flow of goods, like we are
    used to in the United States.
        The teacher I referenced, the teacher in the UK who was
    just looking to replace a laptop. Why is it that somebody has
    to show up on her door with the laptop and say give me another
    $60 for a $225 laptop? That is a perfect way to humanize a
    trade agreement. How does this affect individuals?
        And I see it all the time. You know, the resort in Canada
    that I was working with. You know, they just wanted to upgrade
    their network, but we could not do it. The customer said, well,
    alright, maybe we will visit it next year. You know, like
    geeze, if we could just get this done now.
        Representative Comstock. So it ends up depressing their
    business.
        Mr. Quade. Exactly.
        Representative Comstock. There is nobody there who is
    necessarily engaged in this, but there is no reason they
    couldn't be. I mean the U.S. is the leader in this area of
    digital trade at this point, so there is nothing to fear from
    us in terms of--I mean, who would be our nearest competitor in
    the digital trade area?
        Mr. Quade. I think perhaps one of the other members of the
    panel could answer that, but with--I think I referred to the,
    what was the phrase that I used, we're the United States of
    Stuff. We've got lots of stuff in this country, and a lot of
    stuff that we do not need anymore, you know, but other
    countries do.
        And we have got a whole bunch of it, and it is just sitting
    around. And companies like us, we can get extra life out of it,
    and we can provide it to people that need it. But I think in
    terms of other countries like us, I don't know----
        Representative Comstock. Like maybe, what about various
    countries in Africa, developing countries where they have an
    increasingly educated workforce, but they are seeing all kinds
    of trade barriers. How would this help say Uganda, or Kenya, if
    anyone has any thoughts on that?
        Mr. Griswold. Well, I think it is a great opportunity for
    them and for us. As Nick points out, there is a great demand
    over there for stuff that we've got that we no longer need. So
    I think it is a great opportunity to export this used stuff
    here in America to great benefit over there, and they are
    getting online.
        They have access to cellular networks over there, and it is
    transforming the way business is being done in Africa. So there
    is a great opportunity there. We can earn more through our
    exports.
        But again, the issues are largely over there, and we need
    to work with them. The African Growth and Opportunity Act is a
    good thing Congress has done to encourage trade there, but
    you're right. It is both good business, and also the U.S. by
    being a good citizen in the world encourages trade with those
    countries.
        Representative Comstock. Thank you.
        Mr. Sepulveda. I'm sorry, if I could just add quickly. In
    traveling around the world I spent a significant amount of time
    in the developing world, particularly in Latin America but in
    Africa as well. And where you see--it is fascinating to see
    people who want to be connected so badly.
        I mean, you will see kids without shoes but they will have
    a cellphone. There is a hunger for this type of connectivity.
    The challenge is that in too many countries governments see it
    as a revenue grab, essentially, to tax digital goods, to tax
    high technology products, because they feel it is a luxury.
        But the fact of the matter is that connectivity and these
    sources are no longer a luxury; they are a necessity to compete
    in the modern economy.
        So one of the things we did is we created the Global
    Connect Program, and we teamed up with the World Bank to try to
    send the message to finance ministers around the world to focus
    not on taxation but on connectivity.
        And we have seen examples of success. So in Colombia, for
    example, they had a program called Viva Digital, and the idea
    was to not tax computers and tablets. And they did a reverse
    auction system by which to connect their rural communities. And
    they connected 90 percent of rural Colombia, and a computer was
    actually cheaper in Colombia than anywhere else in Latin
    America because of these programs to incentivize consumption of
    these goods and get people connected.
        Representative Comstock. They are changing the taxation.
    With a focus on education, they see it as education rather than
    a luxury good. It is not watching movies; it is educating the
    kids. And having these kids, you know, if you are in a rural
    area in a Third World country, you still can get access to the
    best education if you would just get these tablets that we can
    take our used ones and get to them, right, and be a dynamic
    change for them.
        Mr. Sepulveda. And these tools will make them better at
    whatever they are good at. So if you are really good at
    agriculture, be really good at agriculture. And use the
    connectivity and the tools of the internet and the information
    services to be better at it.
        You can't tax your farmers, your ranchers, from getting
    these tools that are necessary to succeed in a modern economy.
    It won't work.
        Representative Comstock. So it's sort of a modern day
    machine and tool tax, which I know still in the U.S. we are
    always trying to get rid of in various places because it is
    taxing the tools to get things done. We need to get rid of
    these taxes internationally.
        Representative Paulsen. We are going to wrap up. I would
    like to thank the witnesses again for being here today. The
    record will be open for five business days for any Member that
    would like to submit questions for the record. And this hearing
    is adjourned.
        [Whereupon, at 11:26 a.m., Tuesday, September 12, 2017, the
    hearing of the United States Joint Economic Committee was
    adjourned.]

                           SUBMISSIONS FOR THE RECORD

        Prepared Statement of Hon. Michael S. Lee, Vice Chairman, Joint
                               Economic Committee
        Good morning and welcome to the Joint Economic Committee's hearing
    on digital trade. Chairman Tiberi could not be here today and has asked
    me to chair the hearing. I want to welcome my colleague Ranking Member
    Heinrich, the other Members of this Committee, and the panel of expert
    witnesses who are appearing before us today.
        What is digital trade? It covers a wide variety of economic
    activity, including: international orders transmitted through websites;
    global connectivity enabled by email and voice-over internet protocol;
    international banking; and data transmissions to manage global supply
    chains.
        Advancements in technology mean that digital trade is capable of
    delivering ongoing improvements in production, distribution, and value
    for Americans. U.S. firms have been pioneers and global leaders on the
    digital technology frontier. American consumers and businesses greatly
    benefit from the ability to buy and sell across borders and gain access
    to new products and customers.
        We are swiftly approaching the point where the word ``digital''
    will be an unnecessary adjective for trade. Although, I'm sure trade
    lawyers will want to maintain the extra level of specificity for
    billing purposes.
        But we need to work both domestically and internationally to
    facilitate trade and innovation. We should seek to ensure that sensible
    regulations and standards are put in place for the protection of
    intellectual property and private information.
        Congress has set clear priorities for negotiating trade agreements
    that can lower trade barriers for digital goods and services, and the
    Trump administration is pursuing those priorities in the current NAFTA
    discussions.
        It is critical for future U.S. economic success to ensure a
    regulatory setting in which innovators, entrepreneurs, and businesses
    can experiment with new technology and succeed in a global market.
        I will now yield to Representative Paulsen, who earlier this year
    launched the Bipartisan Digital Trade Caucus in the House of
    Representatives.
                                   __________
      Opening Statement of Hon. Martin Heinrich, Ranking Democrat, Joint
                               Economic Committee
        Thank you, Vice Chairman Lee, and thank you to our panel for being
    here today.
        E-commerce touches industries across all sectors of the economy and
    Americans across the country. It is a key source of American jobs and
    21st century economic growth and its importance will only grow.
        We know that the internet enables U.S. companies, big and small, to
    efficiently reach markets around the world. Manufacturers, banks,
    retailers, airlines, farmers and a range of other businesses rely on
    the internet to seamlessly access and move data across borders.
        The internet has fundamentally transformed our lives--and the way
    we buy goods.
        The benefits of international trade used to be concentrated among
    big business. The internet changed all that, opening doors to small and
    mid-sized businesses and even one-person shops.
        Now, an individual with a broadband connection can sell his or her
    goods and services all over the world--from an artisan from Acoma
    Pueblo, to a game designer from Albuquerque or a Hatch Chile farmer in
    Cruces, they can all now enter the global market place.
        A recent study found that 95 percent of U.S. small and medium
    businesses on eBay export and 190,000 of these firms export to four or
    more continents.
        The United States is an e-commerce leader today. The International
    Trade Commission estimates that digital trade contributed more to gross
    domestic product than all but four states in 2011, and has lifted wages
    by as much as 5 percent, while adding up to 2.4 million more full-time
    jobs.
        In New Mexico, we are working hard to ensure that the opportunities
    of the digital economy reach every corner of the State. I'm excited to
    welcome Facebook, which is scheduled to open a multi-building data
    center next year in Los Lunas that will generate more than 100 jobs at
    the data center and up to 1,000 construction jobs.
        With 2 billion monthly active users, Facebook is literally built on
    cross-border data flows.
        To fully realize the gains from digital trade, we need to ensure
    global policies enable companies to harness the power of the internet
    to reach new customers around the world.
        For this to happen, it's vital we have a free and open internet,
    with privacy protections. And that starts right here at home. Your
    personal information should not be shared or sold without your consent.
    Your health, financial and other personal and sensitive information
    must be protected.
        While internet providers must be prevented from selling users'
    personal information without user consent, companies should be able to
    choose where to store data.
        When U.S. companies can't store data in the U.S., they lose out on
    jobs and the ability to use the data to improve their products and
    services.
        As far as we've come, with the number of internet users worldwide
    tripling in the past decade, we are still in the early stages. And the
    opportunities for e-commerce, domestically and internationally, are
    unlimited.
        But, to realize the potential the internet provides, we need to
    accelerate the roll out of broadband and ensure that rural areas and
    tribal communities have greater access. Right now, four in ten rural
    residents lack broadband access, and among rural tribes, that number
    climbs to seven in ten without access.
        To help bring more Native American students online, I will soon
    introduce legislation that promotes broadband access for students and
    tribal community members.
        During a meeting I convened at the Santa Fe Indian School recently,
    the Tribal Administrator of Santo Domingo Pueblo in New Mexico Everett
    Chavez put it this way: ``Access to the internet is new, but it is an
    equally essential infrastructural need to our tribal communities as
    water, power, telecommunications, or roads.''
        It doesn't matter if you are a student, rancher, manufacturer,
    teacher, doctor or small business--high-speed internet is critical to
    thriving in the economy of the future.
        Finally, as we focus on digital trade today, we should be clear
    that this is just one piece of a bigger issue.
        We need to be vigilant, to evolve the rules of the road when new
    technologies are developed, and to protect our workers from countries
    seeking advantages through unfair trade practices.
        Mr. Chairman, I look forward to hearing from our panel, and I'd
    like to thank former Ambassador Daniel Sepulveda, the witness I
    invited, for being here today.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Questions for the Record for Mr. Daniel Griswold Submitted by Chairman
                                   Pat Tiberi
        Since World War II, the United States has been a world leader in
    path breaking technologies that have spread around the world.

          Why do you think the United States leads the world in
    technical innovations and why many U.S. companies are leaders in the
    world markets?
          Do you think our traditionally free domestic market
    economy abets this development?
          What are the biggest obstacles domestically to the
    digital economy and to the growth of U.S. digital trade?

                 answer for the record for mr. daniel griswold
        Chairman Tiberi,

        Thank you for the questions on digital trade. Here are my thoughts:
        The United States is a technology leader for a number of reasons:

          Our world-leading higher education system, which is a
    mixture of public and private institutions that must compete with each
    other for students and tuition dollars;
          Our open economy that exposes producers to import
    competition for goods and services. This spurs domestic technology
    companies to control costs, innovate, and provide the best possible
    products and services to their customers;
          Our relative openness to immigration. High-skilled
    immigrants allow U.S.-based companies to expand and to create new,
    innovative products. According to a June 2017 report from the
    Massachusetts Technology Leadership Council, 40 percent of America's
    Fortune 500 companies were founded by immigrants or the children of
    immigrants. A 2016 study by the National Foundation for American Policy
    found that more than half of the start-up companies in the United
    States today that are valued at more than $1 billion, so-called
    ``unicorns,'' were started by immigrants.\1\ In Silicon Valley today,
    more than half of the high-skilled IT workers and entrepreneurs are
    foreign-born;\2\
    ---------------------------------------------------------------------------
        \1\ Stuart Anderson, ``Immigrants and Billion Dollar Startups,''
    Policy Brief, National Foundation for American Policy, March 2016.
        \2\ Sari Pekkala Kerr, William Kerr, Caglar Ozden, and Christopher
    Parsons, ``Global Talent Flows,'' Journal of Economic Perspectives,
    Vol. 30, No. 4, Fall 2016, p. 84.
    ---------------------------------------------------------------------------
          Our venture capital markets that allow start-up companies
    to access the seed money they need to grow;
          Strong intellectual property protection within the U.S.
    market;
          An entrepreneurial culture in which risk-taking is not
    only accepted but encouraged;
          And finally, as you note, our relatively free domestic
    market economy that allows resources, including workers and capital, to
    flow to sectors and regions of the economy where demand is highest.
    Among the most import freedoms is labor market flexibility.

        As for the biggest obstacles to digital trade, my view is that they
    lie primarily outside the United States. My best advice to Congress
    would be to encourage the Trump administration to pursue the sound
    negotiating objectives on digital trade that Congress approved in the
    Bipartisan Congressional Trade Priorities and Accountability Act of
    2015. Through bilateral, regional, and multilateral trade negotiations
    the United States should pursue agreements that:

          ensure non-discriminatory treatment of physical goods in
    the digital trade environment;
          prohibit forced localization of servers;
          prohibit restrictions to digital trade and data flows;
          prohibit duties on electronic transmissions; and
          ensure that legitimate regulations affecting digital
    trade are the least trade restrictive as possible.
          Congress should also seek higher, more commercially
    realistic de minimis thresholds for e-commerce shipments to other
    countries, which as you know remains a huge obstacle to small and
    medium-sized U.S. companies seeking to export directly to customers
    abroad.
                                   __________
         Questions for the Record for Mr. Daniel Griswold Submitted by
                       Representative Carolyn B. Maloney
        I represent a district that is one of the financial service and
    publishing capitals of the world--and so New Yorkers are very
    interested in measures that could help to strengthen and expand digital
    export opportunities for U.S. based businesses.
        I also agree with our witnesses that the world could be a more
    prosperous and more enlightened place if there were fewer barriers to
    the swift movement of data, goods, people and information.
        Placing arbitrary limits on how and where big data moves and is
    analyzed can slow the pace of innovation and just makes things more
    expensive. It's inefficient and can act like a hidden tariff.
        And I find it to be unfortunate and short sighted of the government
    of China to block the site for The New York Times.
        But I also think that making the world of digital trade better--is
    not only a matter of knocking down barriers and regulations.
        Because--in some areas--the problem seems to be that regulations
    and agreements in place now are not being adequately enforced--Digital
    piracy overseas is hurting many U.S. businesses.
        And in other areas--needed regulation is either currently
    insufficient or lacking altogether.
        Take for instance--the protection of sensitive private
    information--like Social Security numbers.
        I am very concerned about the recent Equifax hack--which may become
    the most economically damaging hack in U.S. history. The hack involved
    the personal data of as many as 143 million Americans--including their
    names, addresses, birth dates, Social Security numbers, and in some
    cases their driver's license and credit card numbers.
        That is nearly half of all the people in the country.
        And the Equifax hack also included the personal data of up to 44
    million British consumers as well.
        If a bad actor has all that personal data about you--he can apply
    for credit cards in your name, take out loans, file tax refunds, even
    apply for government benefits.
        Or he can sell it on the dark web--over and over again--not just
    now--but for years to come. And he can sell it to people who will use
    it to commit cybercrimes that haven't even been invented yet.
        The Equifax hack is the Irma of cyber hacks--and to make it even
    worse--it's the third major hack of Equifax in less than two years.
        Unfortunately--failures like this by U.S. based companies can have
    a negative spillover on the reputational standing of other U.S. data
    exporters in the global market. In the past--the EU has expressed
    concerns about the sometimes-inadequate measures taken by U.S.
    companies to protect data privacy.
        The Europeans have claimed--and not without reason--that the U.S.
    does not guarantee a sufficient level of protection for European
    citizens' personal data.
        Even before the Equifax affair--European concerns threatened to
    disrupt data flows between the U.S. and the EU.
        In 2015, the Court of Justice of the European Union invalidated a
    Safe Harbor Agreement that allowed personal data to be transferred with
    the U.S.
        Basically--the failures of some have hurt other innocent actors as
    well.
        The U.S. invented the internet--and this is an area where we should
    be the unquestioned leader.
        So--in light of the recent Equifax breach--my question to our
    witnesses is: What regulations, if any, should the Federal Government
    consider putting in place to protect consumer privacy--so that data
    sent to--or stored in the U.S. will be secure. What should our
    exporters do so that they are viewed as setting the standard? Where
    should our country set the bar--so that we are viewed around the globe
    as the leaders--not the leakers of the world's sensitive private data?
                         answer by mr. daniel griswold
        Representative Maloney,

        Thank you for your important question. As I confessed at the Sept.
    12 hearing, I am not an expert in cybersecurity. I do agree with your
    general point that ensuring that data is secure is an important step to
    promoting digital trade and maintaining the attractiveness of the
    United States as an innovative hub for technology.
        As a trade policy analyst, my primary interest is to promote the
    greatest freedom possible for your constituents to engage in digital
    trade around the world, both as importers and exporters. To that end, I
    fully endorse the negotiating objectives on digital trade that Congress
    approved in the Bipartisan Congressional Trade Priorities and
    Accountability Act of 2015.
        Among the negotiating objectives that impact cybersecurity is the
    recommendation that we seek agreements that would prohibit other
    governments from requiring local storage or processing of data. Despite
    recent breaches, the United States can offer some of the best
    cybersecurity systems in the world. Allowing data to be stored in the
    United States as well as in other countries will allow companies to
    maximize their ability to keep data secure.
        Another relevant trade negotiating objective is to obtain
    commitments from our trading partners that ``domestic regulations that
    affect digital trade in goods and services or cross-border data flows .
    . . are the least restrictive on trade, nondiscriminatory, and
    transparent, and promote an open market environment.'' Such commitments
    will help foreign governments guard against the temptation to use
    legitimate concerns about cybersecurity as a cloak to protect their
    domestic digital service providers at the expense of more competitive
    American companies.
                                   __________
         Questions for the Record for Mr. Daniel Griswold Submitted by
                        Representative David Schweikert
        With blockchain and distributive ledger technology in its infancy,
    how important is it to prevent a tax or border fee for the exchange of
    data secured through this technology? Furthermore, if a ``data tax''
    was imposed by a country, how do you see that impacting the blockchain
    ecosystem?
                    answer submitted by mr. daniel griswold
        Representative Schweikert,

        Thank you for your very important question about the emerging issue
    of a data tax and distributive ledger technology.
        I approach this issue as a trade policy expert, not a technology
    expert, but I can confirm that blockchain technology holds tremendous
    promise for enhancing the economic benefits of international trade.
    Around the world, companies and governments are realizing that
    blockchain technology can enhance security, speed efficiency, and
    reduce costs for international trade. The technology is already having
    a positive impact on digitizing and automating global supply chain
    management and the payments process for trade financing.
        My concern with a data tax is that it could slow the development of
    the technology and at the same time prove to be difficult to implement.
    A data tax would act as a kind of global tariff on trade, depriving
    consumers and producers alike from realizing the full benefits of
    international competition. It could also have the unintended
    consequence of pushing more transactions ``underground'' into a global
    black market.
        Finally, a global data tax would go against the sound trade
    negotiating objective that Congress endorsed in its 2015 Trade
    Promotion Authority legislation that the United States should seek
    agreements ``to extend the moratorium of the World Trade Organization
    on duties on electronic transmissions.'' This should continue to be a
    goal of U.S. trade policy.
                                   __________
    Response from Mr. Sean Heather to Questions for the Record Submitted by
                              Chairman Pat Tiberi
        Since World War II, the United States has been a world leader in
    path breaking technologies that have spread around the world. Why do
    you think the United States leads the world in technical innovations
    and why many U.S. companies are leaders in the world markets? Do you
    think our traditionally free domestic market economy abets this
    development? What are the biggest obstacles domestically to the digital
    economy and to the growth of U.S. digital trade?
        The United States has led the world in technical innovation that,
    in turn, has produced many leading U.S. companies for a host of
    reasons. Chief among them has been an open, market-based economy that
    rewards risk taking, which is necessary for innovation. The U.S.
    economy is open and connected to global markets and encourages
    investment in human capital.
        Further, while many countries reflexively regulate in response to
    new technology, the United States typically has taken a more thoughtful
    approach.
        U.S. competitiveness in the global economy is the biggest challenge
    we face as a country. In response, we need a range of policy solutions
    that include tax reform, a highly trained workforce to meet the jobs of
    tomorrow, and trade agreements with new trading partners to open
    foreign markets to U.S. products and services.
                                   __________
    Response from Mr. Sean Heather to Questions for the Record Submitted by
                       Representative Carolyn B. Maloney
        So--in light of the recent Equifax breach--my question to our
    witnesses is: What regulations, if any, should the Federal Government
    consider putting in place to protect consumer privacy--so that data
    sent to--or stored in the U.S. will be secure. What should our
    exporters do so that they are viewed as setting the standard? Where
    should our country set the bar--so that we are viewed around the globe
    as the leaders--not the leakers of the world's sensitive private data?
        We need a balanced approach that promotes the cybersecurity of
    businesses and protects their consumers. Regulatory barriers are a
    significant challenge to digital trade, as is the lack of regulatory
    enforcement in foreign markets that allows piracy to go unchecked. Both
    undermine U.S. competitiveness and innovation.
        The question with regard to regulation in the digital economy and
    its relationship to international trade and U.S. competitiveness is
    two-fold: 1) ensuring regulation or lack of enforcement is not a safe
    harbor for masking protectionism, tech transfer, or piracy, and 2) that
    regulatory design is done in the least trade restrictive manner.
        With regard to any high profile data breach, when a company is
    hacked and sensitive information is stolen, the company is the victim
    of a crime. Debate around cyber incidents will raise questions about
    whether a company could or should have done more to safeguard itself
    and its customers. But, the reality is cyber-attacks are crimes, and
    cyber criminals are highly sophisticated
        Attacks target American and foreign companies that have data deemed
    valuable. U.S. companies are committing enormous resources to the
    challenge, and today's cyber-attacks are a cycle of trying to stay one
    step ahead of the bad guys.
        Policymakers need to recognize this and build a supportive and
    collaborative policy environment that focuses on private-public
    partnerships and emphasizes prevention. For this reason, additional
    regulation will not necessarily lead to increased security.
        When it comes to security, attempts to regulate today will become
    outdated tomorrow. Flexible approaches to collaboration and cooperation
    to combat shared threats have significant advantages over national
    regulation, which can fragment the global economy and will always slow
    technological innovation.
        Further, the United States already has in place several regulations
    that protect consumer data privacy. American companies are also active
    participants in privacy frameworks, such as the APEC Cross-Border
    Privacy Rules and EU-U.S. Privacy Shield, which are both global
    standard setting agreements.
        But we also recognize that this is an evolving set of issues that
    runs across several policy portfolios ranging from consumer protection
    to national security. We believe that there should be coordination
    amongst different government agencies and governments and a private-
    public partnership that allows for a collaborative process to promote
    best practices to protect businesses and their customers.
                                   __________
    Response from Mr. Sean Heather to Questions for the Record Submitted by
                               Senator Klobuchar
        How could accurate, reliable data on the economic impact of
    broadband help make the case for investing in rural broadband?
        Broadband deployment is critical to U.S. competitiveness and
    leadership in a global economy, and this certainly holds true for rural
    America as much as it does for our urban areas. Broadband deployment is
    a significant capital investment, and there are real challenges where
    return on that investment is uncertain. Better information about the
    economic impact broadband represents to rural America is helpful, but
    it is unlikely by itself to provide the needed certainty for many
    investors.
        As we work on revising and updating our trade agreements, what
    alternative tools do we have, or should we develop, to address the
    types of trade barriers that affect digital trade across borders?
        As indicated in my testimony, trade agreements are a critical tool
    to combating barriers in foreign markets that adversely impact digital
    trade. However, trade agreements take time and can only be reached with
    willing partners. Many of the challenges American digital products and
    services face in foreign markets are regulatory obstacles. Regulatory
    developments in foreign markets are constantly evolving, making it
    difficult for trade agreements to keep pace. In response, we need to
    have a better ``whole of government'' approach to the challenge, one
    that brings the resources and expertise of U.S. regulators into play.
        U.S. regulators have a primary mandate to protect health, safety,
    the environment, or advance other types of safeguards. However, U.S.
    regulators need a secondary mandate that as part of a larger
    coordinated strategy advances U.S. commercial interests. U.S.
    regulators can be better leveraged to address regulatory barriers
    abroad by advancing U.S. approached to regulation at a peer-to-peer
    level.
                                   __________
    Response from Mr. Sean Heather to Questions for the Record Submitted by
                        Representative David Schweikert
        With blockchain and distributive ledger technology in its infancy,
    how important is it to prevent a tax or border fee for the exchange of
    data secured through this technology? Furthermore, if a ``data tax''
    was imposed by a country, how do you see that impacting the blockchain
    ecosystem?
        First, cross-border data flows are massive and growing. Cross-
    border data flows are 45 times higher than they were in 2015, eclipsing
    global flows of trade and finance. The dramatic increase in cross-
    border data flows has ushered in a more digital form of economic
    activity, enabling goods, services, financial capital and people to be
    moved around the world more rapidly, easily and cheaply. Attempts by
    policymakers to tax these flows as they cross the border would be short
    sighted for a host of reasons and, ultimately, severely limit the
    potential benefits of digitization.
        Second, blockchain technology will have many applications beyond
    any role it plays in serving as an alternate currency. For example,
    some experts see it as holding the potential to revolutionize the way
    government collects taxes, while dramatically easing the burden of tax
    compliance. However, while cross-border data flows that are supported
    by blockchain technology may aid in better answering age old accounting
    questions of allocating revenues or costs, it does not solve
    fundamental political questions over the role of government and how to
    best fund it.
                                   __________
     Response from Mr. Nick Quade to Questions for the Record Submitted by
                              Chairman Pat Tiberi
        Since World War II, the United States has been a world leader in
    path breaking technologies that have spread around the world.

          Why do you think the United States leads the world in
    technical innovations and why many U.S. companies are leaders in the
    world markets?
          Do you think our traditionally free domestic market
    economy abets this development?
          What are the biggest obstacles domestically to the
    digital economy and to the growth of U.S. digital trade?

        1. The United States is a leader in innovation throughout the world
    because of a number of reasons. First, our standard of living is one of
    the best in the world. People live in our country because we have
    access to everything you can need or want. You can get whatever that
    may be in a time efficient manner as well. In the hearing I stated we
    are the ``United States of Stuff.'' We have so much stuff in our
    country people don't know what to do with it. Likely goods sit in
    closets in businesses and homes across the country. Spend a Saturday in
    the donations bay at a local Goodwill and it will shock you the amount
    of quality items people no longer need. Yet in other countries, people
    fight over these goods or might never get access to them.
        Second, we have the best schools in the world here. Harvard, MIT,
    John Hopkins, and we could go on with the list.
        Third, we get access to the latest and greatest tech first before
    everyone else. Also, we as Americans expect the latest and greatest.
    Think of the lines that will form when the iPhone 8 and X come out. We
    are talking about $799 phones!!! Average monthly wages even in some
    European countries make this impossible to purchase yet here, again,
    there will be lines to get it first.
        Fourth, the United States is 5th highest in the world in average
    monthly wages. That brings the top talent here to the U.S. and keeps
    them here. This talent is why we are the leaders in the world in
    innovation.
        2. I don't believe our traditionally free domestic market economy
    abets this development. My question is what is the better alternative?
    Our economic model drives down prices on goods that are not interfered
    with via government or outside influences. Meaning, you can now get an
    iPhone 6 now for $260 or less on eBay and when it was released in fall
    of 2016, it retailed for $650. There is no interference in this market
    and thus it drives down prices. It then makes manufactures step their
    game up on the new models to drive people to the latest and greatest
    model. Then, when there is no longer a market here for these goods,
    international demand is extremely high across the board in various
    industries. Our problem in this country is what to do when old tech is
    no longer needed in our market. We at Relay Networks have a solution
    and that is to reach out to international customers that need the
    equipment for their market. Our greatest challenge is supply and
    getting business/schools to realize that once equipment comes out of
    service, they need to partner with companies like Relay Networks. We
    can then maximize the value and we can get them to the customers
    oversees to bring dollars back into our country.
        3. The biggest challenge domestically is that foreign customs fees/
    process or de minimis, prevents international customers from getting
    affordable access to goods from the U.S. We the U.S. are not that
    familiar with this as our threshold is $800 here, but in other
    countries this is much higher. In Canada for example, the threshold is
    $20. This was set in 1985! The economy of the world has changed so much
    since then, yet Canada stays firm on this $20 threshold. Therefore,
    anything over $20 coming into the country has to go thru customs
    process and have a fee associated with it. In fact, in my testimony I
    refer to a Canadian reported who dived into the numbers and in fact the
    country losses millions of dollars a year just collecting the fees.
    What a waste and Canada should be our number one foreign customer as we
    are a half days drive from the boarder, but sadly they are not. We have
    lost deals because of this ridiculous threshold and process.
                                   __________
     Response from Mr. Nick Quade to Questions for the Record Submitted by
                       Representative Carolyn B. Maloney
        I represent a district that is one of the financial service and
    publishing capitals of the world--and so New Yorkers are very
    interested in measures that could help to strengthen and expand digital
    export opportunities for U.S. based businesses.
        I also agree with our witnesses that the world could be a more
    prosperous and more enlightened place if there were fewer barriers to
    the swift movement of data, goods, people and information.
        Placing arbitrary limits on how and where big data moves and is
    analyzed can slow the pace of innovation and just makes things more
    expensive. It's inefficient and can act like a hidden tariff.
        And I find it to be unfortunate and short sighted of the government
    of China to block the site for The New York Times.
        But I also think that making the world of digital trade better--is
    not only a matter of knocking down barriers and regulations.
        Because--in some areas--the problem seems to be that regulations
    and agreements in place now are not being adequately enforced--Digital
    piracy overseas is hurting many U.S. businesses.
        And in other areas--needed regulation is either currently
    insufficient or lacking altogether.
        Take for instance--the protection of sensitive private
    information--like Social Security numbers.
        I am very concerned about the recent Equifax hack--which may become
    the most economically damaging hack in U.S. history. The hack involved
    the personal data of as many as 143 million Americans--including their
    names, addresses, birth dates, Social Security numbers, and in some
    cases their driver's license and credit card numbers.
        That is nearly half of all the people in the country.
        And the Equifax hack also included the personal data of up to 44
    million British consumers as well.
        If a bad actor has all that personal data about you--he can apply
    for credit cards in your name, take out loans, file tax refunds, even
    apply for government benefits.
        Or he can sell it on the dark web--over and over again--not just
    now--but for years to come. And he can sell it to people who will use
    it to commit cybercrimes that haven't even been invented yet.
        The Equifax hack is the Irma of cyber hacks--and to make it even
    worse--it's the third major hack of Equifax in less than two years.
        Unfortunately--failures like this by U.S. based companies can have
    a negative spillover on the reputational standing of other U.S. data
    exporters in the global market. In the past--the EU has expressed
    concerns about the sometimes-inadequate measures taken by U.S.
    companies to protect data privacy.
        The Europeans have claimed--and not without reason--that the U.S.
    does not guarantee a sufficient level of protection for European
    citizens' personal data.
        Even before the Equifax affair--European concerns threatened to
    disrupt data flows between the U.S. and the EU.
        In 2015, the Court of Justice of the European Union invalidated a
    Safe Harbor Agreement that allowed personal data to be transferred with
    the U.S.
        Basically--the failures of some have hurt other innocent actors as
    well.
        The U.S. invented the internet--and this is an area where we should
    be the unquestioned leader.
        So--in light of the recent Equifax breach--my question to our
    witnesses is: What regulations, if any, should the Federal Government
    consider putting in place to protect consumer privacy--so that data
    sent to--or stored in the U.S. will be secure. What should our
    exporters do so that they are viewed as setting the standard? Where
    should our country set the bar--so that we are viewed around the globe
    as the leaders--not the leakers of the world's sensitive private data?
        The issue of data security is important in regards to digital
    trade. Equipment and data are traveling outside the United States every
    second and this will continue to grow indefinitely. In terms of
    equipment; in 2014 the Department of Defense adopted National Institute
    of Standards and Technology (NIST) standards in place of their own
    standards. This move helped align DOD with civilian agencies so the
    result would be the same risk standards for all IT systems in terms of
    data wiping. NIST 800-88 is the accepted guidelines for media disposal
    and data erasure compliance. I have included a link to the NIST 800-88
    publication:
        https://12382-presscdn-0-52-pagely.netdna-ssl.com/wp-content/
    uploads/nist-800-88.pdf
              relay networks supports and practices nist standards
        In this ever expanding cyber world threats will continue to evolve.
    The United States Government, according to public documents, spent $28
    billion on cybersecurity in 2016 according to budget watch dog
    Taxpayers for Common Sense. However, according to Market Research Media
    on Oct. 2 2017 the Federal level would have to grow at 12% a year just
    to hit $22 billion in 2022. The United States fiscal budget is so vast
    that it is hard to pin down an exact figure for how much is spent on
    cybersecurity per year. We do know that the U.S. Government in FY 2017
    had an $89.9 billion IT budget. The question of the effectiveness of
    our efforts is really hard to answer because the amounts of spending
    for individual spy agencies are classified. Indeed Rep. Peter Welch
    said in 2015, ``The top-line intelligence budgets for 16 Federal
    agencies are unknown to the American taxpayer and largely unknown to
    most members of Congress in spite of the strong recommendation by the
    9-11 Commission that they be disclosed . . . ''
        We do know that in 2015 the Office of the Director of National
    Intelligence disclosed that the 2016 non-military intelligence spending
    request was $53.9 billion for FY 2016. FY 2013 individual agency
    budgets were reveled through the Washington Post via Edward Snowden.
    The Post reported that FY 2013 spy agencies, including Central
    Intelligence Agency and National Security Agency, were awarded $52.6
    billion not including another $23 billion for military intelligence
    programs. How much these individual agencies are spending on
    cybersecurity we may never know and that includes members of Congress.
    We will just have to trust that these agencies are spending enough on
    cybersecurity as well cannot pin point a dollar amount in their
    budgets.
                                   __________
        Response from Ambassador Sepulveda to Questions for the Record
                        Submitted by Chairman Pat Tiberi
        Since World War II, the United States has been a world leader in
    path breaking technologies that have spread around the world.

          Why do you think the United States leads the world in
    technical innovations and why many U.S. companies are leaders in the
    world markets?

        The U.S. has historically made the basic investments in research
    and development, infrastructure, and educational institutions necessary
    to create a platform for innovation. The internet itself came out of a
    DARPA project and it is no coincidence that our centers of venture
    capital funding and innovation surround strong institutions of higher
    education.

          Do you think our traditionally free domestic market
    economy abets this development?

        Yes, the ability to conduct business efficiently across state lines
    allows for an economy of scale that helps our start ups grow quickly.

          What are the biggest obstacles domestically to the
    digital economy and to the growth of U.S. digital trade?

        The digital economy is doing well domestically but it isn't
    reaching everyone and we aren't making the most of our domestic talent
    pool. Every high school should have computer science classes available
    for their students, every local chamber of commerce and community
    should encourage start ups in businesses serving the needs of working
    families and the sector in which their locality is competitive, and
    every small business should be connected to the internet and reaching
    consumers worldwide. The market alone will not get us there due to the
    difficult economics of building networks out to sparsely populated
    communities.
                                   __________
        Response from Ambassador Sepulveda to Questions for the Record
                 Submitted by Representative Carolyn B. Maloney
        I represent a district that is one of the financial service and
    publishing capitals of the world--and so New Yorkers are very
    interested in measures that could help to strengthen and expand digital
    export opportunities for U.S. based businesses.
        I also agree with our witnesses that the world could be a more
    prosperous and more enlightened place if there were fewer barriers to
    the swift movement of data, goods, people and information.
        Placing arbitrary limits on how and where big data moves and is
    analyzed can slow the pace of innovation and just makes things more
    expensive. It's inefficient and can act like a hidden tariff.
        And I find it to be unfortunate and short sighted of the government
    of China to block the site for The New York Times.
        But I also think that making the world of digital trade better--is
    not only a matter of knocking down barriers and regulations.
        Because--in some areas--the problem seems to be that regulations
    and agreements in place now are not being adequately enforced--digital
    piracy overseas is hurting many U.S. businesses.
        And in other areas--needed regulation is either currently
    insufficient or lacking altogether.
        Take for instance--the protection of sensitive private
    information--like Social Security numbers.
        I am very concerned about the recent Equifax hack--which may become
    the most economically damaging hack in U.S. history. The hack involved
    the personal data of as many as 143 million Americans--including their
    names, addresses, birth dates, Social Security numbers, and in some
    cases their driver's license and credit card numbers.
        That is nearly half of all the people in the country.
        And the Equifax hack also included the personal data of up to 44
    million British consumers as well.
        If a bad actor has all that personal data about you--he can apply
    for credit cards in your name, take out loans, file tax refunds, even
    apply for government benefits.
        Or he can sell it on the dark web--over and over again--not just
    now--but for years to come. And he can sell it to people who will use
    it to commit cybercrimes that haven't even been invented yet.
        The Equifax hack is the Irma of cyber hacks--and to make it even
    worse--it's the third major hack of Equifax in less than two years.
        Unfortunately--failures like this by U.S. based companies can have
    a negative spillover on the reputational standing of other U.S. data
    exporters in the global market. In the past--the EU has expressed
    concerns about the sometimes-inadequate measures taken by U.S.
    companies to protect data privacy.
        The Europeans have claimed--and not without reason--that the U.S.
    does not guarantee a sufficient level of protection for European
    citizens' personal data.
        Even before the Equifax affair--European concerns threatened to
    disrupt data flows between the U.S. and the EU.
        In 2015, the Court of Justice of the European Union invalidated a
    Safe Harbor Agreement that allowed personal data to be transferred with
    the U.S.
        Basically--the failures of some have hurt other innocent actors as
    well.
        The U.S. invented the internet--and this is an area where we should
    be the unquestioned leader.
        So--in light of the recent Equifax breach--my question to our
    witnesses is: What regulations, if any, should the Federal Government
    consider putting in place to protect consumer privacy--so that data
    sent to--or stored in the U.S. will be secure?

          We need comprehensive privacy protection legislation. The
    Clinton FTC and the Obama administration both called for improvements
    to our privacy laws and objections from industry kept it from
    happening.
          Many of our best and largest firms have strong internal
    data protection practices and we should codify those best practices.
          There is no reason that Equifax should have been able to
    hide the breach of their security for as long as they did and there is
    no reason that they shouldn't have had in place protections to keep the
    breach from happening. But none of that is illegal today. They may face
    some after the fact investigation and penalties from the FTC but they
    won't be the first and it is obviously not having a sufficient
    deterrent effect on future actors.

        What should our exporters do so that they are viewed as setting the
    standard?

          Our exporters and importers of personally identifiable
    information should publicly report their privacy protection practices
    and continually upgrade those practices.
          There are numerous rights that Europeans have now when
    American firms collect their data and bring it to the U.S. that
    Americans do not enjoy. The EU-U.S. Privacy Shield protections for
    Europeans are a gold standard and our law should provide those same
    protections to Americans.

        Where should our country set the bar--so that we are viewed around
    the globe as the leaders--not the leakers of the world's sensitive
    private data?

          We are clearly the world's leader in innovation and some
    attribute that to our flexible and relatively light privacy laws and
    practices. It is a balancing act and we do not want to kill the
    internet goose laying golden eggs. But if we do not recognize that big
    data and vague rules of the road are exposing everyday people to
    substantial harm, the American people will turn on our technology
    stakeholders in much the same way they turned on our open trade
    stakeholders.
          These are really hard issues. People much more talented
    and capable than I have struggled with them for two decades. What we
    really need is open deliberation on potential solutions and a good
    faith effort at bipartisan cooperation and collaboration with true and
    meaningful outreach and engagement with the technology community of
    firms, civil society, and academics.
                                   __________
        Response from Ambassador Sepulveda to Questions for the Record
                       Submitted by Senator Amy Klobuchar
                          economic impact of broadband
        Ambassador Sepulveda, I introduced the Measuring the Economic
    Impact of Broadband Act (S. 645) with Senator Capito. This bill would
    require the Department of Commerce to conduct an analysis of the
    effects of broadband deployment and adoption on the U.S. economy,
    including how broadband deployment and adoption impacts employment,
    education, job creation and population growth.

          How could accurate, reliable data on the economic impact
    of broadband help make the case for investing in rural broadband?

        This is an excellent and necessary idea. It would shine a light at
    a granular level on what the digital divide is costing America.
        Broadband adoption and deployment are strong, but not strong
    enough. And for the millions of Americans it is failing, the immediate
    and long term costs are high.
        You and others have been working on these issues for years.
    Broadband providers are sensitive to criticism of their efforts and
    worry about having to compete with government or having competitors
    leverage government against them. We have to get past those fears and
    work together to understand the challenge at a granular level the way
    you propose and then attack it with policy scalpels and significant
    additional funding to ensure that we are not leaving rural and lower
    income Americans living in digital deserts. The market is not going to
    reach the left behind without policy incentives, mandates, or the
    allowance for the public provision of service. The longer we wait to
    address the challenge, the more inequality we will see.
               addressing barriers to international digital trade
        Ambassador Sepulveda, you raised several points regarding barriers
    to digital trade across borders. The barriers you cited included data
    localization requirements, local content requirements, and data
    protection regulations. Additionally, privacy standards are critical
    for protecting consumers. As noted, these types of trade barriers are
    not easily addressed by using traditional trade tools.

          As we work on revising and updating our trade agreements,
    what alternative tools do we have, or should we develop, to address the
    types of trade barriers that affect digital trade across borders?

        Our strongest tools lie in structured engagement out of State,
    Commerce, and USTR with their counterparts overseas. The most
    challenging barriers to digital trade are not coming from our bilateral
    trade counterparts. They arise in China, Brazil, India, South Africa,
    Indonesia, and elsewhere. They are rooted in fear of technology and
    worries that their people are only consumers in the digital economy,
    not producers or profiting participants.
        We need to work with policymakers abroad to incentivize investments
    in local content development to help them preserve their culture. We
    need to work together across security teams to ensure that data stored
    outside of jurisdictions is not a mechanism for avoiding law
    enforcement. We also need to take a hard look at our privacy laws and
    regulations and update them for the digital age. And lastly, we need to
    model a new digital social construct that allows gig economy workers to
    port benefits across gigs, provides some form of wage insurance in lean
    years, and makes training and continuous skill development accessible,
    affordable, and rewarding.

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